Setting correct expectations is key when investing and when working with a financial advisor. In a business of helping clients achieve their financial goals, there can be decisions by clients whether to continue working with a financial advisor or to find a different financial advisor to work with. In this recent insight, I want to focus on a client and financial advisor relationship.
In my current role, my firm will gain and lose clients for different reasons. We recently had a client decide to leave our firm and in my opinion, it was probably due to a misunderstanding of what financial advisors do, don’t do, and can’t do. In this particular case, I believe the financial advisor that the client decided to move on from, is a solid financial advisor and was very involved with trying to do the best for the client. I think in this particular case, it was a misunderstanding of what this financial advisor could or couldn’t do.
A lot of clients believe their financial advisor can accurately predict the markets, pick the best investments, make more money in up markets and protect a lot of value in down markets. Based on my experience, everyone wants this but it is not plausible. Even the best investment managers with the most resources cannot guarantee performance for anything. I’ve covered so many different investment managers and investment styles that no one really knows what is going to happen, they can just take educated guesses. A lot of times, these investment managers from different firms have the same information and will come to different conclusions. If the biggest/best firms can’t get it right all the time, clients should never expect a financial advisor to get it right all the time. This is where the misunderstanding and not setting the correct expectations up front result in clients and financial advisors terminating their relationship.
I have worked with many financial advisors and I have yet to see any one financial advisor with more resources than the largest, most well-resourced investment teams. Because of this, I do not think clients should have expectations that their financial advisor will be any better than other larger, investment-focused firms when it comes to investing. Rather, the client should focus on making sure the financial advisor understands their financial situation, their risk tolerance and their investment style preference. This is what the client should focus on when working with a financial advisor not what the financial markets are doing.
If you look at the lessons of what drives financial markets on this website, you will quickly understand that there are so many drivers of market movements, no one will be able to accurately determine the movements of the market consistently over different periods of time. For financial advisors specifically, a financial advisor should be your quarterback, general manager, or CFO of your finances. Financial advisors should makes sure your financial risks are managed to reduce the risk of you not reaching your goals. They should not be your only investment strategist, trader, research analyst, tax reviewer, financial planner, estate manager, etc. No one is that good to do it all.
Based on my experience, clients often terminate their relationship with their financial advisor for investment performance, but the financial advisor never sets the expectation that its really not about investment performance. It’s about the whole package of services. The financial advisor should explain to clients that they cannot accurately predict the markets over any period of time and that their value isn’t to always beat the market. Again, professional investors that do this on a daily basis can’t beat the market in every market environment. Unfortunately, most financial advisors are afraid to tell clients that they shouldn’t be measured by outperforming on the upside and downside, but rather keeping pure to an investment risk profile and investment style. That is what should be measured.
Unfortunately, a financial advisor saying they can’t consistently outperform the market won’t attract many clients, so financial advisors will often oversell and underdeliver on investment performance. Some advisors will get lucky, others will get unlucky. In my opinion, financial advisors should focus on what they can control and be truly transparent to clients to where they can’t add a lot of value.
Often financial advisors will obtain clients by showing a strong performing backtested or historical performance of an investment or investment strategy. That’s an easy way to show strong performance, but again, that is overselling. Anyone can show an investment that did well in the past. Give a 10-year old a computer, have them go to Mornignstar.com and they can find a 5-star mutual fund that did well the last 5 years. That is not adding value. If clients are relying on filtering for the best historical performing investments, they don’t need a financial advisor.
If you oversell (strong historical performance that is unlikely to persist into the future) and clients have expectations for future outperformance that doesn’t materialize, this mis-management of expectations will result in clients leaving that financial advisor. The client will then search out another financial advisor that oversells an investment that worked well the last few years, the client will go to the new financial advisor, the client’s expectations for performance won’t materialize, and the client will find another financial advisor. Wash, rinse, repeat.
Chasing financial advisors is the same as chasing markets. Neither is a great strategy. When financial advisors and clients can set correct expectations on investment performance and where the financial advisor’s value is truly generated (not from always beating the market, focus on financial planning, etc.), only then can the financial advisor – client relationship have set correct expectations and sustain a long-term business relationship.