In the last few weeks, an increasing number of financial advisers have told me that they’ve been having difficult conversations with their clients, especially at review meetings. It seems that the recent volatility in investment markets is causing concern for clients who are naturally worried about the performance of their investments.
Some advisers have told me that their clients have asked them for a reduction in the adviser’s fees, as a result of the flat or falling investment portfolio values. These advisers say things like, “My value is being called into question”.
If investment markets continue to be volatile – and I believe we’re entering a very difficult period – we can probably expect this situation to get even worse.
Why do we have this problem?
I find that the relationships we build with clients go right back to the very first interactions, and the initial promises we make to people in the first meeting. For lots of advisers, the promise is about investment outcomes. Sometimes, it’s done explicitly – “I can help you generate better returns, or stop you losing money” – and sometimes it’s not explicit, but clients expectations are either not challenged, or are poorly managed. Often, clients just forget what we told them at the first meeting, and if it wasn’t documented very well, then we’re potentially in trouble.
The financial services industry has a series of big challenges here:
- Despite what we say, we’re really interested in the client’s money, not the client.
- We believe we are the experts when it comes to investments, and tell people what to invest in
- Many of us are focused on the investments and enjoy analysing and researching investments and funds, even though we rarely add any value in doing so (seriously we don’t!).
You might disagree, but it doesn’t change the fact that your client is blaming you for the outcome, because you probably told them what to do.
We’ve been here many times before, and we don’t seem to have learned anything. Maybe we’re not listening, or maybe we’re just a bit too arrogant, or overconfident in our abilities, or maybe we’re just not clear about where our value is?
Fundamentally, most of us have attached our value to the increase in the money, and that game has been very easy to play over the last decade. Our value proposition is still mostly about selecting funds or stocks, and our pricing model is based on gathering AUM. We’re horribly conflicted, and for a lot of us, the job we say we’re doing is not what we’re qualified to do, or actually doing.
How do we solve this problem?
The sooner that financial advisers and planners realise, and admit, that they are not investment managers, the better. The last decade has been easy because the market has been kind. I would suggest that many advisers have probably made a ton of money without having done very much.
Now, it’s getting tough.
The next thing is to be honest with clients and explain that we have no idea what the market will do, and we’re not investment managers. Clients will ask why they should bother speaking to us then, and we’ll have to find a compelling answer. Actually, we’ll have to find a compelling set of questions. We’ll need to work out what the client’s real problem is, that we can actually solve, because that’s what we need to attach our value to.
Your client can buy an investment portfolio anywhere, and to them, we all look more or less the same. If your client is buying the solution to a problem that you’ve helped them identify and ‘own’, then that’s an entirely different matter.
Here’s an example:
Last week, a colleague and I met a couple who we have recently taken through our ‘onboarding’ process. On Wednesday, we delivered our presentation meeting. This was the third meeting, and the one where we show the clients where they stand financially, and help them to understand the impact on the choices they face in their lives.
Unfortunately, we had to show them that they were not going to have enough money to do all the things that they wanted to do, and they had to face some challenging trade-offs.
As it happens, the client had made a very large investment just before we started working together. The investment was made, via a broker, into the Allan Gray Stable Fund. I don’t get involved in products and funds, so can’t comment on the AG fund, but I know it’s a common selection for many advisers. Interestingly, in the conversation, the client described it as the Allan Gray “Unstable” fund which is probably unkind to Allan Gray, but maybe you can see their point, given what’s taken place in recent months. The point is that they were disappointed that the fund value had gone down so much, and they believed their expectations had not been met, so they were not best pleased with the broker.
The burning question
When we meet with people for the first time, I’m rarely surprised that, when we ask “So, how can we help you?”, the answer is usually transactional in nature. Most clients don’t really know what the real questions are, and I believe it’s our job to unpack this, through asking better questions.
Usually, the burning question is “Do we have enough money to __________(fill in the blank)?”
It’s almost always the burning question, and in this case, once I knew what that was, I told them that this was a problem we could help him solve.
Back to the planning meeting. We took the clients through our process and the answer was yes, they could do what they wanted to do, but they would run out of money in their early 80’s.
The husband was shocked. He believed they had a lot of money, and relatively speaking, they do.
A big discussion ensued around whether this was important, how long they might live, whether these ‘goals’ were in fact their goals, or whether they wanted to do other things instead. As it turns out, now that they knew the truth, the original goals were probably not the real goals and we’re now having another conversation, a completely different conversation…
… Like, ‘moving to a different country’ conversation!
Wow. Things can change quick.
The previous adviser never had this conversation with them. He probably doesn’t know how to. He probably doesn’t have the right skills/tools, or maybe he didn’t want to. Who knows? What I do know is that the client is giving him a hard time because expectations about their investments haven’t been well-managed, and it’s quite likely that the adviser will lose the AUM because the relationship has been based on a superficial conversation.
And that’s the point of this post. Focusing on the money and what funds to choose isn’t enough. It’s fine to say we’re client-centric, but we actually have to be client-centric, and that means putting away our ‘expert’ status, silencing our ego’s desire to deliver a correct answer, and ignoring the conflict of ‘getting the business’ (a.k.a. selling them some funds).
We have to get the client engaged in a conversation about what they’re up to, and what they really care about.
The promises we make
The husband then reminded me about the initial promise I had made to him, which was that if we could not answer the big question, and solve his problem, then he could decide whether or not to pay the balance of our fee. He said he was more than happy to pay the fee, not because of all the work he could see had gone into the exercise (although it’s a lot), not because we’re the experts, not because we’re qualified and regulated, but because he recognised, and felt, the value that we’re adding to his life. It’s experiential.
He said it was refreshing that we hadn’t talked about products and they never felt sold to. This was the kind of conversation they wanted to have all along.
Learning the lesson
I learned the lesson of separating my value from the investment performance back in 2000 – 2003 after the dot com bubble burst, and I too, had difficult client conversations. By 2008, when the markets crashed again, I was better prepared, and so were my clients, and we just continued to have these deeper conversations. I believe that’s what financial planning is actually.
I have a sense of deja vu for many advisers, who are struggling to get away from difficult conversations about investment performance. To be fair it’s not all their fault. The industry has forced many advisers into this position, but it’s the advisers that always carry the burden of reputation and business risk.
Our value is not in picking funds, and telling people what to do. Our value is in facilitating conversations, helping them to understand the trade-off decisions they face, and showing them how to solve big problems.
Perhaps you’d like to read my blog post “What happens when your clients portfolio falls by 40%” for some further ideas?
We can show you how to avoid having such difficult conversations. It’s not easy but it’s definitely worth it.