Financial advisors today have a myriad of challenges facing them in their daily practices. They must wear many hats including those of asset manager, financial planner, psychologist, or marketer in order to succeed. While most advisors can wear some of these hats well, it is very difficult to manage several roles, especially if switching from one role to another during a single advising session.
Here are some of the biggest challenges that financial advisors face today in their efforts to grow their business and promote their brand to the public.
- Nobody said being a financial advisor is easy work—but many of the challenges facing advisors have little to do with finances or investment choices.
- Every client has different goals, perceptions, and expectations on when their goals will be achieved and how to achieve them.
- Different clients will want different levels and means of communication.
- Financial advisors are responsible for aggregating all information in the world and translating it into an actionable plan for their clients.
- Though investment portfolios only report numbers, financial advisors must find the appropriate balance of data-driven analytics and empathetically-driven discussions.
Managing Client Expectations
This is an area where advisors need to understand client psychology in order to succeed. While managing a client’s portfolio may be a very straightforward endeavor, managing their expectations can be much harder. Many clients have unrealistic expectations when it comes to investment returns and interest rates.
For starters, clients are often not financial professionals. They are unaware of general global markets outside of what headlines they may scan. They are often not aware of how investments work, how macroeconomic conditions may impact certain asset classes over others, why markets may be volatile, or how long it may take for investments to be successful.
In addition, every client has their biases, preferences, fears, and expectations whether those are abundantly clear or not. Clients may have perceptions of what they think may happen based on what has happened before. Bitcoin might have increased six-fold from 2019 to 2021, but the asset class may not six-fold every two years. It is up to the financial advisor to guide on why or why not this is like to occur again and educate their client while providing investment advice.
Advisors need to be able to show their clients how they add value to the investing equation. One of the ways that they can do this is by helping clients to maintain a long-term perspective in their investing so that they don’t go off track with every movement in the market. Of course, it takes time to do this consistently but clients who can begin to see how their advisor is keeping them on track will be much more likely to remain loyal to their advisor.
Staying in Touch
Advisors have more ways than ever to stay in close contact with their clients, but many fail to do so when things are going well. A constant flow of communication is necessary in order to maintain a solid relationship with most clients, regardless of what the markets are doing. Advisors may want to take advantage of such services as Skype and instant messaging in order to keep in touch with tech-savvy clients.
This challenge becomes even more burdensome when portfolio balances are plummeting. During times of economic uncertainty when it might be hardest to discuss losses with clients may be the time they need the most comfort, guidance, expertise, and communication. Bad news is never fun to share, but the transparency of what is occurring in conjunction with a supportive disposition is always appreciated.
Some advisors get caught up trying to stay abreast of the ocean of information that’s available online and elsewhere. Smart advisors focus more on client behavior instead of reacting to the latest news. Advisors also need to be able to direct their clients to reliable sources of data that have stood the test of time in terms of accuracy. This can help to prevent misunderstandings and prevent clients from making mistakes based upon misinformation.
The breadth of information to manage can include but isn't limited to:
- Clients: Client desires, goals, and financial circumstances change. Advisors must be comprised of what is going on in their client's life and how to develop a roadmap to their dreams.
- Regulatory Bodies: Advisors must be aware of regulations and changing laws in their profession. This may be required for them to maintain licenses needed to transaction certain securities.
- Economics: Macroeconomic conditions are out of the advisor's and client's hands. However, global economic circumstances drive portfolio balances. As the world shifts and changes, advisors may be aware of broader consequences for investments.
- Politics: Government action (or inaction) had broad financial implications for almost all investors. Advisors must be aware of upcoming legislation to position their clients favorably.
- Taxes: Specific government action on taxes often have direct consequences on investment strategy. Changes to capital gains tax rates, tax brackets, tax credits, treatment for alternative investment assets, or treatment for foreign investments change the trajectory of your client's portfolio.
Many financial advisors are very rational, analytical people who think logically. Professional certifications are often data-driven, computationally heavy, and require extensive rational thinking. Many financial roles require degrees in finance or other numerically-drive fields.
However, many client decisions are based upon emotion. Advisors need to be able to relate to their clients on an emotional level in order to maintain a working relationship. This may involve explaining the emotional ramifications of an investment or planning decision, so that they client can see how it will impact them on an emotional level.
This engagement comes in many different forms. For instance, imagine a client's portfolio is not performing well. Engagement includes:
- When to tell the client
- How often to subsequently check-in with the client
- How to tell the client (i.e. do they prefer blunt language or would want a soft landing?)
- Where to tell them (i.e. is electronic message most appropriate for the situation?)
- Preparing for how they may react
Independent financial advisors may often feel alone in their practices and have little in the way of planning support. Advisors who struggle with this can find support in organizations such as the Financial Planning Association and the National Association of Insurance and Financial Advisors (NAIFA) or the National Association of Personal Financial Advisors (NAPFA). These groups can provide a wealth of resources in marketing, sales, practice management and other aspects of the profession that can make advisors’ lives easier.
How Can Financial Advisors Manage Expectations?
Managing expectations is a very socially driven, psychological issue that requires empathy, communication, and education. Clients often do not have the knowledge or expertise that their advisor has, and each client experiences different emotions regarding changes to their portfolio. Financial advisors must understand that their perspective is different from their client's, and bridging that gap is the responsibility of the advisor.
What Information Do Financial Advisors Manage?
Financial advisors are responsible for aggregating their client's needs, the financial markets, political and tax changes, and financial regulation into a single, cohesive strategy. As changes to any of these sectors happen, financial advisors must adjust accordingly.
Where Can Financial Advisors Find Support?
All professional certification groups have some level of support to help financial advisors with the challenge of balancing multiple roles. These groups may have forums, local chapters, advisors, or communication channels to express concerns.
The Bottom Line
It is more important than ever for advisors to understand where their clients are coming from and make them understand the value that they offer. Those who are able to successfully manage their clients’ expectations can improve retention and their bottom lines. Joining one of the professional associations can also provide additional support.