Earlier this year, Morningstar launched the Adviser Insights Survey, a comprehensive survey about practice management. The survey provides insight on advisers’ goals, business priorities, client management techniques, and challenges in their practice. The study is ongoing, but this column will share early findings on advisers’ business goals and challenges, based on the responses of nearly 300 participants. When the final results are available, we’ll share them with advisers who complete the survey.
Morningstar developed the survey in collaboration with advisers to address the practice management questions that are at the top of their minds. While numerous studies benchmark basic business metrics, few provide a lens into the day-to-day challenges advisers face, such as client acquisition, relationship management, and succession planning. This study aims to provide these answers and arm advisers with new data and ideas for facilitating their practice. In this article, we will focus on two of those issues: adviser goals and business priorities.
What Advisers Aim to Achieve
The survey asks about topics ranging from advisers’ challenges to their five-year goals. Overall, the responses give a clear picture: Many advisers are focused on a direct link between having an impact on their clients’ lives and building a successful business. Let’s dive into what that means.
When asked what they like most about being an adviser, the plurality of advisers chose “the impact I have on clients’ lives” as the most common benefit that drives them; 31% of respondents selected this option as opposed to 17% for the second-place choice, “I enjoy working directly with clients,” which also emphasizes the value advisers put on client relationships. “The lifestyle and work-life balance,” “the interesting challenges and problems that the work presents,” and “it fulfills my passion for investing and financial planning” rounded out the top selections.
Morningstar also asked how advisers determined whether a client had succeeded in the long term. Consistent with the broader goal of having an impact, 42% of advisers said when “the client achieves the lifestyle he or she wanted,” followed by “the client achieves their financial target(s)” for 35% of advisers.
The survey then asked respondents to rank their business priorities for the next five years. The top three choices were “growing the business via more clients,” “growing the business via additional AUM with existing clients,” and “retaining clients.” The lowest priorities were “selling the business,” “moving to a different compensation mix,” and “succession planning,” respectively.
What hinders advisers from reaching these business goals? Respondents selected the biggest challenge to growing their business, and “acquiring new clients” was chosen more than twice as often as the next choice of “hiring additional advisers for the practice.” Following were “competition from other adviser firms,” “maintaining compliance with regulations,” and “increasing business from existing clients.” Winning new clients appears to be a much more difficult challenge than creating success and increased business from current ones.
The Challenges to Communicating Value
Morningstar also asked advisers to select the reasons prospects give for not becoming clients. The most common reason given was that the prospects “managed money themselves and did not want outside help.” The second most cited reason was that prospects were “already using another adviser,” followed by “felt that the service was too expensive” and “didn’t feel it was the right time for services.”
The data suggests that while winning new clients is the top challenge and business priority of most advisers, many prospects either believe they can handle their own financial management, already have an adviser they are happy with, or don’t believe their financial issues are important enough to justify the expense of professional advice at that given time. It shouldn’t be a surprise that many investors think they can achieve their financial goals independently, and for some investors, this is true. For others, the belief may reflect our common overconfidence bias, which can drive people to greatly overestimate their abilities. In a 2006 study by James Montier, now of GMO, 300 professional fund managers were surveyed (Montier, J. 2006. “Behaving Badly.” DrKW Macro Research Paper, Feb. 2). Seventy-four percent of the participants believed they had performed above average, while the remaining 26% admitted they were just average. Individual investors do not appear to be fundamentally different. Our head of behavioral sciences, Steve Wendel, has asked a similar question of investors, and generally only 5% to 10% of investors see themselves as below average.
Past Morningstar research suggests that investors either underestimate or are unaware of the value of financial advice. As we covered in this column last issue (“Do Advisers Know What Clients Want?”), when we asked investors what they value most when selecting a financial adviser, investors put “helps me stay in control of my emotions” and “acts as a coach/mentor to keep me on track” at the bottom of the list.
More-Effective Communication
Advisers can overcome the challenge of communicating value to prospects with lessons rooted in behavioral science.
First, have prospects get specific about their past experiences. Overconfidence bias convinces investors that they don’t need help, and confirmation bias adds fuel to the fire by making examples and information supporting that position more salient in their minds. Having the prospect intentionally recall and think through both positive and negative past examples gets them out of those emotional reactions and into a more rational assessment of their successes and struggles. To do this, ask specific questions about their experiences. For example, if they have invested before, have them tell you about their best and worst investments from the past. The answers to such questions get past the aspirational version of their financial lives and create a more balanced view of their abilities.
Advisers can also educate prospects on investor psychology. Research has shown such education to be much more effective in improving financial outcomes than traditional financial literacy. If someone is struggling to save enough money, for example, assure them it’s a common challenge because of present bias and mental accounting and present solutions such as automation, accountability, and clearer goals. This may resonate in a way that typical financial information does not and can help differentiate your services. Even if you aren’t an expert in behavioral finance, relating to people’s struggles and sharing lessons from overcoming past clients’ behavioral challenges can be valuable. You can learn more about behavioral finance with Morningstar’s free Adviser Tool kit.
Next, make the cost of behavioral biases clear. Investors generally don’t understand how much behavioral mistakes cost them in the long term. In his “Mind the Gap” studies, Morningstar’s Russel Kinnel has been tracking these costs annually for a decade. In his 2018 study, he found that the average investor trails the average fund in performance over an annualized 10 years by 26 basis points due to behavioral mistakes such as poor market-timing.
Make the costs clear to prospects so the risk of rejecting financial advice is quantified and salient. Demonstrate what that difference would mean to their current financial goals. Research by Vanguard shows that avoiding behavioral mistakes of emotion and discipline with the help of an adviser adds, on average, 150 basis points annually to returns (Kinniry, F.M., Jaconetti, C.M., DiJoseph, M.A. et al. 2016. “Putting a Value on Your Value: Quantifying Vanguard Adviser’s Alpha.” September. Vanguard White Paper).
Lessons Learned
Most advisers consider winning new clients a top priority, but also their biggest business challenge. While advisers have admirable goals of having a positive impact on the lives of their clients, they may struggle to achieve that without having enough clients to serve. To overcome this challenge, advisers can use behavioral science to more effectively communicate the value they can bring to prospects. They should have potential clients get specific about the good and the bad of their financial lives, share lessons from investor psychology to educate and differentiate their practices, articulate the cost of behavioral biases, and emphasize the quantifiable gains that can be achieved with an adviser’s help.
This post by Erik Johnson, senior marketing optimization manager, behavioral sciences at Morningstar earlier appeared on Morningstar.com