Clients care more about performance than advisors do.

    Last year our firm stepped out on a limb to ask our clients what they thought was our value to our relationship with them. We got some fairly predictable answers, but among them were a few that really surprised us. "You have valet parking," one client told us, "There's no hassle when I come for my appointments." Another confided, "You've kept our marriage together. My wife stopped nagging me about my poor investment choices. Now when the markets are bad, it's not my fault, it's yours." 
    One of our favorites was the response from a 76-year-old widow. "I never have to explain to my sister why her son Joey can't sell me another annuity. I simply tell him that my wealth manager handles those decisions now."
    Our firm advisors certainly have their ideas about what our value to our clients are, but not one of them came up with "passing the buck" or "parking." We listed items like "they sleep well at night" and "they have a trusted advisor in us." On a small scale, this demonstrates the value and communication disconnect that we often have with our clients about our advice and service.
    A few months ago Fidelity Registered Investment Advisor Group completed a study with HNW Inc. on wealth and advice. HNW interviewed high-net-worth (over $1 million investable assets) and ultrahigh-net-worth (over $5 million investable assets) investors, asking questions about advisors and their advice. To complement the study, HNW then interviewed the advisors. The findings demonstrated a marked difference in perception, particularly regarding value, advice and performance.
    It was fascinating to discover that neither clients nor advisors have a consistent description for the term wealth management. Although the common thread for investors seemed to be focused on "providing solutions," 28% of investors felt that it was preserving wealth, while 19% considered it building wealth and 6% stating that it was support in transferring wealth. On the other hand, 80% of advisors spoke about the quality of the relationship, describing it as "deep and broad" in nature and using terms such as "holistic," "all-encompassing" and "closer."
    This discrepancy is most apparent when the survey asked investors to choose which factor is most important: portfolio performance or personal relationship with their advisor. A whopping 79% felt that the portfolio performance is most important. My associates were shocked at this notion. We think that if we have a close relationship with our clients, support them resolving financial (and sometimes nonfinancial) issues, then we can sustain our relationship with them. We educate them that we cannot consistently outperform the market and that we firmly believe that no one can. We are so sure that they understand our philosophy. (We throw a great Thanksgiving party every year too.) The fact is, clients do want good performance, and we are kidding ourselves if we minimize or discount this aspect in our relationship with them.

It's Still About Managing Expectations
    You've probably been harangued to death about the importance of managing client expectations. But, let's be clear; managing expectations is not accomplished with quarterly meetings and an occasional market perspective letter. We can't placate them with our polished "Don't worry; think long term" speech. For many of our clients, long term is a green banana, anyway. Managing expectations requires a constant and a diligent proactive process of communication. You must use every opportunity to reinforce your philosophy. When your clients go to cocktail parties or knock off a round of golf, they will be the ones with information, not gossip about market movements. That doesn't mean you can't provide them with some form of bragging rights, though. Our clients take pride in telling everyone that after the last bear market they're not broke, unlike their "chase the return" friends. "Managing expectations" means making difficult calls to clients when the markets are down significantly. It means sending a note on extremely volatile days to give them your opinion. It also means declining to participate in the exuberance when the markets are up. Remember, sometimes we get so carried away by the positive market movements, we actually take credit for them.
    Having spent the last few years telling advisors to put their reviews together, this presentation will minimize the performance report. For example, our performance page is the last one in the package. Before that page, we show the current and target allocation, a chart depicting the CPI versus the return, and the various benchmarks for the different asset classes we use. In our meetings, we dutifully turn to the first page (allocation) and have what we believe is a meaningful discussion about whether we need to make changes because the portfolio is out of balance. We're kidding ourselves, of course. Unless we are there to prevent them from turning the pages, the client would make a beeline for the last page every time.
    Putting client returns in context is somewhat helpful in controlling expectations. But, truthfully, benchmarking goes only so far. In the Fidelity study, 63% of the investors surveyed stated that they benchmark their investments to the "overall market" which probably means the S&P 500; 15% used their peer group as a benchmark. Whatever they use, they still expect their annual returns to be in excess of 15%.
    Compare this to the advisors' expectations and we easily see the expectation disconnect: 64% of the advisors expected a slight growth in the market, while 24% expected it to be flat. We know that subconsciously our clients are still wondering why we can't get them out at the top of the market and back in at the bottom.
    Thankfully, wealth management is not just about investments. It was comforting to learn that investors know that too. Only 4% of the respondents to the Fidelity survey thought that wealth management was just investment management. However, there is still a wide gap between our clients' experience and how we demonstrate our value.
    We often neglect to remind our clients of the value of the noninvestment advice we give them. For example, does your quarterly report have a progress report for items such as tax planning, estate planning or charitable gifting strategies? Do you keep an ongoing action plan throughout the year so that clients are fully aware of the activities you accomplish for them each quarter? Do you follow up each action with communication to the client?
    The survey findings may also suggest that as advisors we may be just too focused on the features of our relationships while the investors are looking at the benefits. It's more difficult for people to get their arms around the intangible (features) than it is the tangible (benefits or solution.) A good way to bridge this gap is to look at your current brochures and other marketing material. If you talk about "looking holistically at your financial life" you may want to rephrase with something like "providing holistic solutions to meet your goals and objectives."
    In fact, you may want to look closely at all your collateral material. Are you presenting features or benefits? Our marketing package includes a document outlining the meeting process, explains the investment policy process, the ongoing review process and, more importantly, how they will benefit from our relationship. Nowhere does it say that "we will be your friend, play golf with you on Tuesdays and take you to dinner once a quarter."
    Of course, it's possible that the participants in the survey overemphasized the importance of performance in their relationship with their advisor. After all, some of my clients have been with me more than 20 years, including years like 1987, 2000 and 2001. It could be that investors might think that if they downplayed the importance of portfolio performance, advisors would not work as hard on the investment piece. It could be that they aren't secretly obsessed with maximizing returns and are just satisfied with accomplishing their goals and objectives. Could be. You think?

Deena Katz, CFP, and Harold Evensky, CFP, are nationally recognized financial advisors. Katz is president and Evensky is chairman of Evensky & Katz Wealth Management in Coral Gables, Fla.