Lessons learnt from clients’ perception of advice

Financial advice is more than picking stocks or managed funds and advisers need to understand the different services that are important to their clients, Matt Walsh writes.

It has been a decade of ongoing change and uncertainty for the financial planning profession.

From the Financial Services Reform Act to the Future of Financial Advice reforms, with the global financial crisis thrown in for good measure, it has been a challenging and, at times, difficult period for financial advisers.

An overarching theme during this time has been the impact of regulatory and economic change on clients, both existing and prospective.

Much of the debate has centred around whether the ongoing changes will adversely affect clients, by making advice more expensive or more complicated.

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Financial advisers have grappled with ways to ensure they can continue to provide comprehensive advice and strategies while still being able to run a viable business.

Trying to fully understand what investors are thinking and how they view financial advice has been an ongoing challenge, but a necessary one.

Since October 2007, the Lifeplan Financial Planning Satisfaction Index (FPSI) has measured feedback from investors who use financial advisers about the performance, trust and reliability, and technical ability of their financial adviser.

Perhaps the most illuminative of the ongoing trends and issues found has been the variance between how men and women view their financial adviser, as well as the difference in attitude between older and younger investors.

Differences in gender

For most of the lifetime of the survey, women have had a more positive view of their financial adviser than men.

Across the three drivers of performance, trust and reliability, and technical ability, women have consistently rated their financial adviser higher than men have.

However, perceptions have still tended to move in the same direction.

That is, when women's perceptions of their financial adviser have dropped, so have men's.

There are just a few instances where perceptions have moved in opposite directions, such as between April and October 2012 when female perceptions improved across the board while male perceptions dropped.

This coincides with the period when there was an increased focus on the need for financial advisers to provide holistic advice, incorporating areas such as estate planning, risk management, philanthropy, and children's education.

It suggests that women were more attracted to this kind of financial planning approach, causing them to rate financial advisers more highly on all three measures.

For financial advisers, this provides useful feedback on what kinds of services they should be considering offering and ways to attract more female clients to their business.

At the same time, however, male clients can't be ignored, and a fall in the perception of men on these key drivers is a concern.

Interestingly, a similar trend was seen in the most recent survey (April 2016) when male and female perceptions diverged across all three drivers.

Financial advisers should take heed of this trend and ensure they continue to develop and maintain strong relationships with their male clients.

Differences in age

Another area of interest for financial advisers is how younger versus older clients view them.

Financial advisers have long been told that they need to expand their client base beyond the traditional older male demographic.

Attracting younger clients, as well as female clients, to their business is seen as key to long-term success.

Unfortunately, the perception of younger clients of their advisers does not seem to have improved noticeably over the course of the survey.

Perceptions of investors aged over 60 are still the most positive, followed by those aged between 45 and 60 years of age.

There is some good news — in the most recent survey, there was an uptick in how younger clients — those aged below 44 years — perceived the performance and technical ability of their adviser.

Their perception of the trust and reliability of their financial adviser remained much the same since the previous survey, which could also be taken as a good sign since this driver has tended to fluctuate markedly over the course of the survey, showing significant movements up and down.

Trust and reliability is clearly an area that financial advisers still need to focus on, finding ways to better communicate and educate clients of all ages about what they are doing for them and why they are making the recommendations they are.

However, different age groups will require different approaches.

Older investors, for instance, who have become quite familiar with their financial plans over time, are likely to need more checking in that life is still on track as "assumed".

Financial advisers should not be complacent because once stable clients may experience sudden changes in health or family demands.

Younger investors on the other hand are likely to be more interested in regular updates on areas such as market and economic performance, or new services available to them — information that keeps them informed and up to date.

They will also need reinforcement of the long-term benefits of their financial plan when short-term market fluctuations might be creating doubts.

The index research shows that it takes time for clients to understand the long-term benefits of what a financial adviser brings to their financial situation.

The methods used to communicate with investors is relevant as well. While older investors may prefer traditional methods of communication such as face-to-face meetings and old style "snail mail" communication, a different approach may be able to be taken with younger investors.

Online account information, phone apps and electronic communication may be the preference for this cohort.

Another challenge advisers need to stay abreast of is any uptake of younger clients of emerging robo-advice tools, especially how financial advisers can use it to service different types of clients.

Impact of market movements

A common concern for financial advisers is that the fluctuations for the market — over which they have no control — is affecting how their clients view them and the role that they play.

After all, markets have been unprecedentedly volatile over the lifetime of the survey, so it's understandable that the financial planning community may feel they are being unfairly judged on performance or ability.

To help work out whether this is a valid issue — for instance, whether a downturn in the market results in clients valuing their financial adviser less — the International Centre for Financial Services (ICFS) removed the impact of market movements from the results of the survey for the last four years.

What this showed is that while market movements do have some impact on how clients view the performance of their financial adviser, it can't be used as a blanket excuse.

There are still some clear trends that are independent of what the market was doing at the time.

For example, and somewhat surprisingly, fees tend not to be a significant focus for clients.

Instead, clients are more concerned with the quality of advice and service they are getting from their financial adviser, regardless of actual investment performance.

This is especially true of older clients (that is, those aged over 50). This shows that, while the regulators are focused on the price of advice, actual clients are focused on and understand the value of advice.

They are two different things — as Mark Twain wrote, a cynic is "a man who knows the price of everything and the value of nothing".

Clients are also very focused on the technical ability and financial literacy of their financial adviser, particularly if they have a high opinion of their own financial literacy.

So what does this all mean for financial advisers? There are some useful lessons.

Firstly, communication is vital. Keeping in regular contact with clients, particularly as they get closer to retirement, is necessary to maintain strong relationships.

Secondly, financial advisers have an important role to play in educating and informing clients. It's something that they are already doing, but they need to continue putting efforts into this area. In particular, they must ensure clients understand that advice is about more than picking stocks or managed funds — other services are very important to clients, especially women and younger clients.

And finally, financial advisers should keep building the younger and female client base but not at the expense of ignoring the traditional older/male client base.

Matt Walsh is the head of Lifeplan Funds Management.