One persistent struggle for financial advisors has been to find ways to communicate the value that they bring to the table. Fortunately, several recent studies have tried to quantify that value – down to a specific number of basis points annually – and have generally shown that financial advisors can more than cover their advisory fees with a wide range of value-added benefits… most significantly, by helping clients overcome the dreaded “behavior gap” that exists between the returns of the market, and the (lesser) returns that investors would otherwise realize on their own due to their behavioral biases.
Unfortunately, however, a recent Morningstar survey of almost 700 individual investors found that the advisor’s ability to help “control their emotions” is perceived as the least valuable service an advisor can provide from the consumer’s perspective… even as it’s the most valuable benefit from financial advisors according to the advisor research! Yet this ironic gap in the value of getting help with the behavior gap actually makes sense, since investors themselves often don’t see that their behaviors are a problem in the first place.
Nonetheless, this gap between what the research suggests is a benefit of working with a financial advisor, and what consumers state they actually value, raises the question: Does the real gap lie between market and investor returns, or between what investors actually value and what advisors think they value?
In our fifth episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss the question of whether advisors should even bother trying to communicate the value they provide when helping clients manage their “behavior gap”, why attempting to convince prospects that you can help them manage their behaviors is perhaps an uphill battle, and how maybe the best way to overcome the behavior gap (and the perceived value of getting help with the behavior gap) is by shifting a client’s perspective altogether.
The starting point is to realize that most clients don’t initially seek an advisor’s help because they suddenly decide they need help clarifying their life goals or making better decisions at key junctures; they come to an advisor first and foremost because they have an acute pain point they need help with. And while for some new clients, that pain point may be due to devastating decisions in the depths bear market – which then prompts them seek out an advisor because they (or more often their spouse) realize that they do need guidance when it matters most – for many consumers, the pain point that drives them to a financial advisor is about some other non-portfolio issue in the first place.
Furthermore, even if many people do undermine themselves by making poorly timed decisions, it’s nearly impossible to “sell it” as a benefit of entering into an advisory relationship, since a client will first have to admit to themselves that they are so bad at making financial decisions that they have no other choice than to hand the task off to someone else! And denial about our own failings – even if it’s true – can be quite powerful. Which is why, in general, trying to position yourself as someone who can help clients “control their emotions” or change their “bad” behaviors is challenging at best. Which is not to say that managing those clients’ behaviors isn’t beneficial… it simply means that people who are in most need of that help will likely have a hard time admitting it.
Ultimately, the bottom line is that advisors do truly add value for their clients by managing the “behavior gap”… but selling that as a key feature of the relationship probably isn’t going to get most advisors very far. Instead, the best way to help clients close that gap is by connecting their use of their capital with what they say is important to them in the first place. And the only way to help a client down that path is to absorb with empathy where they are presently, and then gradually help them understand continuing to make them same decisions that they’ve made in the past won’t get them different results. Which creates the real opportunity for financial advisors to demonstrate their value!