Investors who receive comprehensive advice tend to report more satisfaction with their advisor, even in down economies, than those who receive transactional advice, according to two studies from J.D. Power.
Participants in the company’s 2023 U.S. Full-Service Investor Satisfaction Study and U.S Self-Directed Investor Satisfaction Survey awarded their advisor experience out of a score of 1,000 points. Those that receive comprehensive advice reported a satisfaction score of 861. Those who receive transaction advice listed their satisfaction rate as 665, the company said.
"We’re actually seeing transactional [advice] underperform every other model where a human [gets] involved or even digital advice,” said Craig Martin, executive managing director and head of wealth and lending intelligence at J.D. Power. “We see that when you’re connecting with clients, you’re communicating with them, that could be via digital communication, it’s impactful and that's a critical dynamic.”
Overall, however, the industry is still lacking in providing comprehensive advice to its clients, the firm found. Out of the more than 6,000 people surveyed, only 11% are receiving comprehensive financial advice, while 42% are receiving transactional advice and 47% are receiving goals-based advice. In addition, many investors still do not have a financial plan yet, the firm said.
“We’re seeing a lot of the clients across both studies say they don't have a plan,” Martin said. “Which is a huge red flag for the industry because all sorts of efforts have been out there to build plans and create plans and you have a very large percentage of the client base saying I don't have any plan which again that's your starting point for financial planning.”
Advisors must do a better job of explaining why investors need a plan, Martin said. On the other hand, investors have to be more forthcoming with information. If they do not share something, then the advisor can’t incorporate it into their calculations, he said.
A major reason for an investor not revealing everything is a fear that whatever they tell the advisor they might use against them later, Martin said. It is up to the advisor to help establish a level of trust where the client feels comfortable sharing information.
“I think the core challenge right now is trust,” he said. “It’s kind of two sides of the coin and if you meet in the middle and you're sharing information and then you're getting good advice, you’re going to find a really optimal kind of quadrant where the customer is giving you the information to help you make good recommendations that result in a really positive outcome.”
Advisors can stay in touch with clients without having to schedule face-to-face or phone meetings routinely, he said. The firms that just provide digital advice do not appear to be as successful as those that provide a digital and in-person experience, Martin explained.
“The standalone digital firms certainly have not taken over the world like some thought, but you're seeing more and more firms adopting the blended model where they're using those automated investing that serve clients with access to human support and guidance when needed,” he said.
There is more opportunity to use digital advice with the younger generations, according to the Self-Directed Investor Study. Of the more than 5,000 people surveyed, 86% of those in Generation Z said they were receptive to robo-advice, while 79% of millennials said the same.
The younger generations demonstrate a unique opportunity for advisors to attract using technology, Martin said. Advisors should embrace technology because they can bring younger clients in who may not need the services of an actual advisor right away, but they can still be associated with the firm through digital tools the advisor firm provides, he said.
“Don't be afraid of technology and actually look at it as an opportunity to engage these earlier stage relationships,” Martin said. “They get people comfortable with this concept of advice and guidance and support and so in many ways it's creating your future pipeline.”
Despite the widespread interest in digital advice, not everyone understands how to use it properly or its benefit. Only 22% of investors who use robo-advice offerings from their brokerage firm say they “completely understand” how the technology manages their portfolio, the study said.
In addition, many still seek additional human support outside of working with a robo-advisor or other do-it-yourself advice options. These are chances that advisors can take advantage of to continue to grow the relationship with their clients, according to Martin.
In the end, advisors must find the tools that fit the goals of the investor. Martin emphasized that the hybrid model that combines technology with in-person advice is the one that can sustain a relationship for the long-term.