The nature of financial advice is changing. The rise of new financial technology and clients’ ready access to information means that today’s advisors have to be nimble and attentive to continuously add value to their relationships.
No longer just a matter of price and performance, industry and external pressures – new regulations and low-cost investment solutions – have forced independent advisors to continuously adapt their services. As the demand for advisors continues to grow and those advisors respond to changing client demands, it is likely to become even more difficult for clients to compare financial professionals. Already, advised investors report high satisfaction: A recent Vanguard study shows that eight in ten trust their current advisor.
Measuring the Intangible
All of this means that it’s harder than ever for clients to quantify the value of the advice they receive. Investment performance is relatively objective: clients are, generally, seeking better risk-adjusted returns. Performance can be measured, tracked over time, and benchmarked.
Advisor advice, however, is more difficult to quantify, though studies place its value at somewhere between 3 percent per year and 23 percent over a lifetime. Financial planning is a long-term endeavor that most clients have no previous experience with. While most can evaluate their advisor’s relative experience, their value proposition is more challenging. Where to do you add value to your clients outside of their investments? And how can you keep that value top-of-mind for your clients?
Simplifying a Financial Life
The advisory profession centers on the question of net worth, which is simple to quantify. But the best advisors are also able to help their clients improve their life worth over the course of their relationship.
These advisors help their clients think outside of the box, providing clarity around questions ranging from portfolio allocation to cash flow and planning. Most clients engage an advisor with only a few questions about retirement planning or wealth transfer: They don’t understand how deep their relationship will grow to be.
An advisor is instrumental not only in keeping clients focused on the bigger picture, but also in providing piece of mind. Clients who come to trust their advisors are less likely to worry about the day-to-day gyrations of the market. Studies show that, “investor satisfaction in the advisory relationship tends to come from personal attention rather than from actual financial returns.”
Clients should find their financial lives simplified. As the number and complexity of financial products continues to grow, advisors cut through the noise and deliver targeted, realistic recommendations, from targeted opportunities to annuities and insurance.
Most investors are unrealistic. While the average global stock market yield is about 4 percent over time, Americans expect to earn up to 11 percent per year. Advisors fill that gap by not only resetting expectations, but also by helping savers avoid poor decisions, like attempting to time the market to lock in gains.
The best advisors provide their clients with a perspective they might otherwise lack, even in noninvestment decisions. Stressful crossroads, such as whether or not to switch careers, are easier to navigate when clients understand the financial implications of their decisions.
That translates to reassurance: the RAND Corporation reports that individuals who receive financial advice are not only more likely to have retirement goals, but also to feel confident in their retirement preparations.
The Bottom Line
At the end of the day, even the smartest, most rigorous clients have trouble taking a step back. Advisors help investors understand what’s under – and out of – their control. Unlike alpha, which is easy to quantify, it's vitally important that advisors continuously work to help their clients understand the value of this advice in setting the course of their financial life.