There's no doubt that professional advisors grasp the concept of alpha. It's generally understood to be the risk-adjusted value that a money manager adds to, or subtracts from, a fund's return. Applying the same concept to client relationships, and more specifically to retirement planning, "emotional alpha" is the non-performance value that advisors add to, or subtract from, their interactions with clients.
For various reasons, creating and measuring emotional alpha is fast becoming an important part of practice management. In the first place, the financial services industry has reached a level of parity in both product suite and customer service. In fact, I'd argue that a majority of the industry has become cliché and predictable, especially when it comes to the retirement planning process.
Essentially, anyone can walk into an RIA office, wirehouse broker, trust department, bank or even a local insurance agency and have access to a similar range of products including a professional-looking retirement plan and managed money products such as separate accounts, mutual funds and ETFs. Additionally, new clients could expect a thank-you card for signing up, monthly or quarterly statements, a prepackaged newsletter, and even a birthday or occasional holiday card.
Secondly, the deep emotional scarring that clients have endured over the last decade has caused many clients to rethink how they work with and interact with an advisor. The days of set it and forget it, or buy and hold, are falling by the wayside despite theoretical evidence of their benefit. Clients don't want to hear about theories and research anymore. They've lived a different story and experienced negative results despite the promises illustrated through back-testing and research, and they're demanding alternatives. If markets continue to provide mediocre-to-poor results, advisors have no choice but to concentrate and improve the way they interact and manage client relationships.
What's In It For Me?
Creating emotional alpha starts with identifying advisors' non-performance intentions. Outside of making clients money or protecting their wealth, what do you as an advisor want to add to the relationship? And just as important, what would you like to receive in return? Personally, my mission is to help people speak intelligently about their investment holdings, investment strategies and the impact that varying markets have on them. It's one reason why I write regularly for them and include sound bites for them to easily share. I take this concept a step further by preparing for client meetings as if they were media interviews. I select two to three themes I really want to focus on, and make sure the clients understand these themes and can confidently converse about them with family, friends and colleagues.
Thinking of client meetings like a media interview helps build emotional alpha because, as an industry, we compete against media headlines and interviews that tend to sensationalize the current, short-term situation and not necessarily what our clients are holding. Just as the media employs basic principles to attract listeners, viewers, readers and advertisers, advisors should operate like a media outlet and use the same methods to keep their clients engaged and loyal subscribers.
A client walked into my office recently and pulled my latest e-mail and newsletter from his pile of papers. I couldn't help but grin because he had circled several parts of the newsletter and filled nearly all the white space of my e-mail with his chicken scratch. He said, "I always read your newsletter and I want to ask you some questions about this, that and a few other things."
This is a simple example of positive emotional alpha. The client confirmed that he actually reads my newsletter and seeks my counsel based on what I share with him. I avoid sending prepackaged newsletters and always find a way to tie recent news and events to aspects of clients' portfolios. I've found that to be important when it comes to measuring emotional alpha because the number of client touches is not the measure of positive impact. Instead, it's the relevancy of touches and the degree to which they foster two-way communications rather than a monologue that expresses only the advisor's thoughts and opinions.
If you've been in a one-way relationship, I'm sure you recall how it made you feel. When it comes to communicating with clients, keep them engaged and active throughout the conversation by prompting them to seek your counsel, as well as provide you with referrals.
K.I.T.-Keep In Touch
Another important way to create emotional alpha is to get clients involved in their portfolio decision-making. This can be done effectively by establishing either portfolio or market contact points. If, for example, you meet with a client and the Dow is trading at 11,000, you can simply say, "Let's talk at 1,000 point intervals. If the market jumps up to 12,000, let's decide if we should take some gains, but if it falls back let's decide if we need to minimize losses." What's truly important is that, if nothing else, you've created a contact point ... a simple way to establish your next get-together and create another opportunity to educate your client.
The same can be said with portfolio-related contact points. Instead of market-related contact points, use a 5%, 7% or 10% gain or loss to trigger a discussion on current holdings and the economic outlook. Contact points build emotional alpha by proving to your clients that you are committed to following through on what you said you'd do, which fosters both trust and loyalty.
Be Real Instead Of Cliché
When it comes to creating emotional alpha, the greatest opportunity for advisors is the retirement planning process. As stated previously, much of what financial professionals offer has reached a point of parity and nothing proves the case like traditional retirement planning. Baby boomers, however, are once again provoking a change at this stage of life, and many individuals, employers and professionals are finding there's a need to plan for more than just the financial aspects of retirement. A successful retirement today requires more than a binder full of charts and numbers. Retirees need specific strategies to replace their work identity, stay socially connected and keep both mentally and physically sharp.
A benefit for advisors who position themselves as a quarterback for a variety of services is that they don't need to facilitate everything for the client's benefit. Having access to a variety of tools, tips and resources to help current and soon-to-be retirees craft and live a meaningful retirement assuredly adds emotional alpha. Be prepared, therefore, to steer clients to a Web resource; hand them a guide or worksheet; or give them an outside referral such as a coupon to a personal trainer, a free yoga class or a travel group's newsletter.
Actions Speak Louder Than Surveys
One way to measure emotional alpha is to use a satisfaction survey. These can be great tools, and online surveys like those available at Surveymonkey.com can make them both easy to use and effective. However, like other aspects of the financial services industry, I see them as somewhat clichéd. Everyone seems to have one. In my book, actions speak louder than clicking on a radio button.
Accordingly, as a means of measuring emotional alpha in each client relationship, I suggest five questions advisors should ask themselves:
When was the last time a client contacted you about your newsletter or another communication?
Has a client recently forwarded your e-mail or newsletter to someone else and copied you on it?
Which clients have made a recent referral?
Which clients have you asked to serve as a reference and why?
When was the last time you received a thank-you card from a client?
While I don't expect the SEC or the CFP Board to adopt these questions as an ultimate measure of emotional alpha, they serve as a concrete example of something advisors can use to gauge the value they provide clients beyond the stereotypical.
Emotional alpha is an emerging area of practice management. Advisors need to be more aware of it and find new ways to integrate it into their client relationships and retirement planning methods. It does require advisors to go beyond superficial touches and communications. But it helps advisors build a strong bond with clients and a business model that can help redeem our industry from the grips of the product salespeople and Ponzi scheming charlatans dominating the headlines.