Post on 06-Apr-2018
transcript
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 1/21http://www.ssgads.com • http://kowledge.wharto.pe.ed
Special Report
Bidi t Tt Diid:The Financial Advisor-Client Relationship
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 2/21
Tab f Ctt
I. A Matter o Trst 3
Three Leels o Trst 3
Trst i Techical Competece & Kow How 3
Trst i Ethical Codct ad Character 4
Trst i Empathic Skills ad Matrit 4
How Adisors Ca Damage Trst 5
Fiess abot Fees 6
Trasparec i Fees 7
The Risks o Trasitioig to Trasparec 7
Ratioaliig the Fee Strctre 8
II. What Adisors Kow—ad Do’t Kow—Abot Their Cliets 0
Ke Research Fidigs 0
Respodet Details 4
III. Adisor Best Practices: Bildig Trst with the Fee Discssio 5
For Steps to Sccess Whe Discssig Fees 6
Coclsio 9
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 3/21
At oe time, acial adice sall came olded ito aother serice,
sometimes i the orm o sggestios rom a ta accotat, more
reetl i the orm o stock tips oered b a broker-dealer. Ote,
it was good adice. At times, howeer, it was coficted, becase
moig particlar prodcts sometimes took precedece oer doig
what was right or the cliet.
Oer the last 5 ears, that model has chaged. First, adaces i
techolog ad reglator reorms led to the rise o discot brokers,
makig it diclt or the old-ashioed stockbroker to sstai the
same ee strctre. Later, partl i respose to that assalt, the
acial serices idstr looked to deelop a more stable ad less
cclical reee stream. This t i eatl with cosmer cocers
abot coficts o iterest, ad has led to a ew paradigm i acial
adice—the moemet toward oerig cosltatie serices istead
o prodct pshes ad straightorward ee strctres rather tha
comple or opae oes.
I this report, State Street ad Kowledge@Wharto look at how
acial adisors are egotiatig the bodaries o this eolig
relatioship. Specicall, the report eamies how adisors ca:
. Stregthe relatioships b egederig trst;
2. Best commicate the ale the brig to their cliets
gie how cliets geerall perceie ale; ad
3. Sccessll discss ees with cliets.
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 4/21
3
I. A Matt f Tt
THREE LEvELS OF TRuSTTRuST In TECHnICAL COMPETEnCE & KnOW HOW
There are certain components to trust that every client,
consciously or even instinctively, looks or in a nancial
advisor. First, by and large, investors are looking or
someone whose level o competence inspires trust.
In other words, an investor generally seeks an advisor
who is experienced and knowledgeable, one who can
help the investor make, or single-handedly make on the
investor’s behal, dicult nancial and personal decisions.
According to experts at Wharton and a survey o advisors and clients, trust is the
oundation o the advisor–client relationship. Although that might sound elementary,
it is evidently overlooked by many advisors. In act, some advisors take serious risks
when it comes to cultivating and preserving it through their communication practices,empathic skills, and competence in discussing what can be awkward topics, like ees
or sensitive personal and amily issues.
Charlotte Beyer, CEO o the Institute or Private Investors (IPI) in New York, an educational
and networking group or ultra high net worth individual investors, concedes that, at one
time, wealth management was a business “shrouded in mystery—and very, very high
prot margins.” Since the model has changed, via a transition rom product to service,
many nancial advisors have had to master the art o a new sales tactic. Call it the “sales-
ree sale”, this approach is now an essential part o every successul advisor’s repertoire.
The distinction is noteworthy because there is much less o an emphasis on pitching stocks
and mutual unds, and more on personal counseling and education, say Wharton marketing
experts. As with selecting other service providers, such as a amily physician, the advisor
the client chooses is requently the one the client eels she can trust the most.
As with selectig
other serice
proiders, sch
as a amil
phsicia, the
adisor the
cliet chooses is
reetl the
oe the clieteels she ca
trst the most.
According to Rachel Croson, proessor o operations and
inormation management at Wharton, this type o trust is
encapsulated by the question, “Do I trust that you know
what you’re doing?”
This report ound that although most advisors believe
they understand the importance o trust to the success
o the advisor-client relationship quite well, they may
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 5/21
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 6/21
5
Grubman points out that because wealth brings
unexpected stresses to many individuals and amilies,
coping with money issues can be dicult. Many advisors
struggle with the skills needed to solve the interpersonal
issues associated with wealth management. Grubman’s
bottom line: clients are more comortable and more
likely to continue their relationship with advisors who are
able to integrate the nancial and the personal into their
nancial advising practices. Those advisors who don’t,
will likely ace limitations in the advisor-client relationship
and may nd that they are ultimately unable to satisy the
client. Without the personal dimension, or without the
client’s trust in the advisor to handle personal issues and
sensitive inormation with empathy and tact, the client
will not eel connected to the advisor. Consequently, the
advisor is oten unable to get to the heart o a client’s
nancial situation—the personal issues that underlie
one’s relationship with money.
According to Richard Marston, proessor o nance at
Wharton, increasingly the value o nancial advice is not
really managing the money, but in the “soter” advisory
elements—personal counseling and instruction. “The
advisor has to understand the logic behind the advice
and work the argument through with the client so the
client really understands it.”
Clients are looking or advisors whom they trust
enough—a trust grounded in the rapport established—
to make dicult decisions or them. Barbara Kahn, a
proessor o marketing at Wharton, conveys the need is
similar to what people are looking or in their doctors. In
several research projects on how consumers make high-stake decisions in health care, Kahn ound that while
consumers are good at identiying the most important
actors to consider, such as quality o lie, survival rates,
and cost, they tend to have a hard time putting those
actors together on one weighted scale or in a single
rule. That’s where a trusted advisor comes in: in one o
her surveys, only 15% o respondents said they would
be comortable making a trade-o on a dicult health
care choice or themselves, but 61% said they would
be comortable with their physician’s use o a similar
model.
Kahn notes that similar results were ound when
consumers were asked to make hypothetical nancial
investment decisions. Since the choices that need to be
made in nancial advice are similar to health care issues in
that they are oten unpleasant or dicult (such as saving
money versus spending it now, or taking on additional
risk versus accepting a lower return), her theory is that
people want to nd someone who can make those kinds
o choices or them. “Because they’re stressul and not
un to think about, they would rather ask a nancial agent
to make those decisions,” she says.
HOW ADvISORS CAn DAMAGE TRuST
Even once trust has been established between the client
and the advisor, other variables can serve to compromise
the relationship. As with any relationship, advisors must
understand that trust is not a xed quantity and is easily
diminished. Weak investment returns might seem like
the biggest way in which clients lose condence in their
advisor. However, Wharton’s Bradlow contends advisors
tend to underrate the importance o proessionalism
among every person on the team o sta supporting the
relationship.
In act, Bradlow suggests that oten times only 15-20% o
the client’s contact is with the nancial advisor; the other
80% o the contact is with the advisor’s assistant and
support sta. Those people are likely to have a very large
impact on the client’s opinion o the advisor’s brand.
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 7/21
6 / State Street Global Adisors | Kowledge@Wharto
Bradlow argues that proessional, well-trained support
sta are essential, especially with a relatively new client.
It can take between six months and a year or people to
orm a solid sense o an advisor’s persona and brand,
and that image can be shattered i multiple sources o
contact introduce a view that is somehow incongruous
or inconsistent with what the advisor has presented.
FuzzInESS ABOuT FEES
Fees are another critical area where trust can be easily
diminished. The challenges the industry aces with ees
are well-documented, but the results o the State Street /
Knowledge@Wharton survey suggest that the credibility
o many advisors may be hurt simply because o the way
they are discussing their compensation.
In act, the survey results (see Part II o this report) suggest
that many advisors nd ees a dicult subject to discuss.
And they’re not alone. Z. John Zhang, a proessor o
marketing at Wharton, agrees: “In all service industries,
nobody really wants to talk about the prices. You want
the customer to ocus on the service you provide and the
results that you can deliver. I think or nancial advisors
it’s the same.”
Ironically, although advisors may try to skirt the issue o
ees, leading nancial advisors interviewed or this report
say that most o their clients aren’t all that concerned
about the absolute levels o the ees. What they are
concerned about is clarity. This isn’t surprising: Financial
advisors and marketing experts at Wharton suggest that
or most people, the issue isn’t really whether ees are
high or low, but that they know what they are.
Yet, despite years o negative publicity and controversy,
some Wharton scholars are skeptical that consumers
are getting as much clarity as they desire rom the
nancial services industry. “The most important thing
is transparency—so people know what is going on
unequivocally—and I’m not sure that that’s happening,”
says Leonard Lodish, a proessor o marketing at Wharton
Fuzziness about ees seems to be endemic at every
stratum o the market. Even the ultra-high-net-worth
investors, who presumably are getting the most
sophisticated advice money can buy, are not satised
with the degree o transparency they are getting rom
their advisors, according to a recent Institute or Private
Investors (IPI) survey.
Charlotte Beyer, CEO o IPI, reveals that in the most
recent survey o members in her organization—who are
generally worth $50 million or more—a large majority
elt that while they believe the advice they receive
is objective, they are concerned that they are not
getting quite the ull story about the ees they pay o
the service provided.
In particular, she says, many members o her organization
explain that the way advisors present their ees oten
makes it very dicult or the investors in her group to
assess whether one rm is charging more than another
While the intent o such bundling is to keep clients rom
seeing the service as a commodity, Beyer argues that
the practice is ultimately corrosive to the relationship
“I I don’t eel that I completely understand the ee
structure and I’m not sure I can compare one rm against
the other...it puts a little chink in the trust I have.” And
once that trust begins to erode, she adds, the client
becomes increasingly vulnerable to being snagged by acompetitor.
When attempts are made to clariy ee structures, advisors
shouldn’t discount the potential or conusion or a lack o
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 8/21
7
1 Choi,JamesJ.,Laibson,DavidI.andMadrian,BrigitteC.,“WhyDoestheLawofOnePri ceFail?AnExperimentonIndexMutualFunds”(May2006).NBERWorkingPaperNo.W12261AvailableatSSRN:http://ssrn.com/abstract=905518
understanding o what the ees mean on the client side, either. In a recent study1, ormer Wharton proessor o business
and public policy Brigitte Madrian and two colleagues gave MBA and undergraduate business students prospectuses or
our index unds. One group received an additional “ee sheet” that compared the ees and their impacts on earnings
across the our unds, and another group received a “returns sheet” showing each und’s average annual returns since the
und was started. The participants were then asked to make hypothetical investments o $10,000, choosing among the
our index unds.
Since the unds were identical, the only dierence between them was the ees.
What Madrian and her colleagues discovered, however, was that the participants
“overwhelmingly ailed to minimize the index und ees” by neglecting to put all o their
money in the und with the lowest ee. The students who received the ee sheet did
better than the others, investing more money in the lower-ee unds. “What we draw
rom this is that disclosure matters,” Madrian says, “but how inormation is disclosed
also matters.”
Beyer predicts that this kind o uzziness over ees won’t be around orever. “I you think
about a lot o other things that you pay or—i you go to buy a car, you know what the blue
book says, you know what the sticker price is. Increasingly, nancial services are going to
become more and more transparent,” she says.
TRAnSPAREnCy In FEESTHE RISKS OF TRAnSITIOnInG TO TRAnSPAREnCy
This lack o transparency in ees has helped make many advisors much more vulnerable
than they realize, claims Mitch Anthony, a Minneapolis-based consultant to the nancial
advisory industry. “No matter how much you think you realize the level o distrust over
ees, we underestimate it. It’s easy or the industry to say we’re changing the way we do
business because we want to build trust with our clients, and then come out with a bunch
o touchy-eely ads, but all it does is increase the level o cynicism to the consumer.”
Already, some experts believe that the pressure or more transparent pricing is pulling
the market in two directions. “I think it’s increasingly barbell-shaped,” says Wharton’s
Marston.
The winners, say Marston and others, are increasingly either advisors who oer custom
service (typically on a percentage-o-assets basis) or cheaper, almost automated solutions,
utilizing some o the increasingly popular low-cost index und amilies and exchange
traded unds (ETFs). The losers in the market are those who haven’t adapted to a world
“I o thik
abot a lot o
other thigs that
o pa or—
i o go to
b a car, o
kow what the
ble book sas,
o kow what
the sticker price
is. Icreasigl,
acial serices
are goig to
become more
ad moretrasparet.”
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 9/21
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 10/21
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 11/21
0 / State Street Global Adisors | Kowledge@Wharto
II. Wat Adi Kw—ad D’t Kw—Abt Ti Cit
Although clients desire clearer communication rom their advisors, the ndings o a survey o nancial advisors and
separately, afuent individuals, conducted or this report ound that many advisors’ relationships are much shakier than
they believe.
The survey, conducted by State Street and Knowledge@Wharton to assess the strength o the client-advisor relationship
revealed a material gap between advisors’ perceptions about their client relationships and the clients’ perceptions o
those relationships. While people are notoriously likely to discount the importance o emotional actors such as congenia
personality in their choice o proessional relationships, this discrepancy may still be a cause or concern or advisors and
or the marketers o advisory services— particularly as clients surveyed rated advisors’ perormance about hal as highly
as advisors themselves believe their clients rate them. And that may place some advisors at risk.
Key ndings o the research ollow:
FEES ARE An AREA OF MISCOMMunICATIOn BETWEEn
ADvISORS AnD CLIEnTSFIgure 1
In both the ocus group and the survey, ees were revealed
to be an area where there is a wide gap between what
advisors say and what their clients hear.
The actual degree o communication advisors and clients
have about ees is unclear. Almost all advisors surveyed
(95%) indicated they discuss their ees with their clients;
yet, only 61% o customers say that their advisor initiates
ee discussions with them.
Why the gap in perception between advisors and clients
on the issue? Bradlow believes it’s wishul thinking on
the part o advisors who are uncomortable discussing
ees. “It’s almost like they want to believe that this is
something that’s understood. I you believe that it’s
already been covered, then you don’t have to do it.”
For a graphical depiction o the complete set o raw survey results (advisors and clients), visitwww.ssgaunds.com.
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 1: CoMMunICATIon ABouT Fees:
The FrequenCy oF Fee DIsCussIons (PresenT sTATe)
yeArly
44%
29%
When An
Issue ArIses
18%20%
ClIenT rAIses
The suBjeCT
16%
34%
quArTerly
15%10%
onCe every
2-5 yeArs
7% 7%
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 12/21
Ironically, although advisors presumably don’t discuss
ees out o ear o scaring away clients, the clients who
participated in a State Street ocus group agreed that
they would preer knowing. “I have more o a problem
with not knowing,” said one woman.
FIgures 2 & 3
Perhaps as a result o this lack o contact, only a minority
o advisors surveyed believe their clients understand their
ee structure airly well or completely. Clients conrmed
that they generally do not understand their advisor’s ee
structures all that well.
TRuST IS ESSEnTIALFIgure 4
Among advisors, more than two-thirds ranked trust-
worthiness as the most important attribute in the selection
o a nancial advisor. For clients, trust is also the key
element (69%).
Most advisors said they believed their clients elt that
they were receiving a air value or the ees they paid.
Most clients are, in act, relatively satised with the value
they receive or the ees they pay, but generally less so
than advisors think.
In addition, costs matter much more to clients than
advisors believe. A striking 41% o advisors believed thatcost was their clients’ least important concern. Although
still the lowest-ranked actor, reasonable cost was
believed to be an important aspect (rated as one o the
top two most important attributes) by 31% o clients.
KnOWLEDGE IS MORE IMPORTAnT THAn
ADvISORS THInK
FIgure 5
Another discrepancy between advisors and clients is the
dierent weight they place on knowledge. While only
26% o advisors ranked knowledge as a top attribute,
nearly hal o all clients gave it their highest rating.
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 2: unDersTAnDIng The Fee sTruCTure:
hoW Well Do They unDersTAnD?
CoMPleTely
12%
23%
soMeWhATunDersTAnD
31%29%
FAIrly Well
20%25%
jusTunDersTAnD
29%22%
noT AT All
3%6%
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 3: reCeIvIng FAIr vAlue For servICes ProvIDeD
exTreMelysATIsFIeD
4%6%
sATIsFIeD
52%
36%
verysATIsFIeD
16%21%
soMeWhATsATIsFIeD
25%30%
noT AT All
3%7%
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 4: The IMPorTAnCe oF TrusT:
MosT IMPorTAnT ChArACTerIsTICs oF A FInAnCIAl ADvIsor
TrusTWorThIness
69%74%
unDersTAnDs
FAMIly neeDsAnD goAls
24%20%
PerForMAnCe
4%
10%
CoMMunICATIon
PrACTICes
13%16%
loW CosT
For servICesProvIDeD
5%
12%
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 13/21
2 / State Street Global Adisors | Kowledge@Wharto
Some members o the ocus group also saw competence
as extremely important—and ignorance as nearly a deal-
breaker. In the ocus group, or instance, one woman
who was asked to sell some holdings beore she moved
her account to a new rm, said that she was unable to
get her new rm to tell her what the tax consequences
o the sale would be, not even an estimate. “I wasn’t
really able to get any clear answers,” she says.
CLIEnTS BELIEvE THEIR ADvISORS ARE OBjECTIvE—
TO A DEGREEFIgure 6
Most clients are not entirely satised with the advisor’s
degree o objectivity. Perhaps, this is an indication
that, or most clients, their level o trust in their advisor
is not absolute, especially as it pertains to the ees or
commissions the advisor collects.
BuT ADvISORS DOn’T HAvE MuCH TIME TO
quELL CLIEnTS’ DOuBTS
FIgures 7-10
One challenge or advisors in correcting some o these
preconceptions is that their clients don’t actually want to
communicate more with them than they already do. The
burden, then, is on the quality o the communication and
not necessarily the quantity.
While some advisors would preer meeting with theiclients a little more oten, clients don’t actually want more
contact. In general, a ew more would like to hear rom
their advisor on a monthly and quarterly basis.
100%
80%
60%
40%
20%
0%
CoMPleTelyAgree
sTronglyAgree
soMeWhATAgree
ClIenT
FIgure 6: Degree oF ADvIsor oBjeCTIvITy
soMeWhATDIsAgree
sTronglyDIsAgree
CoMPleTelyDIsAgree
19%
30% 31%
14%
3% 3%
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 5: The IMPorTAnCe oF KnoWleDge:
The MosT IMPorTAnT ATTrIBuTes To servIng ClIenTs Well
KnoWleDgeABle
26%
47%
PersonAlFACTors
38%
14%
ProACTIve
14% 14%
sTABle
4% 6%
TrAnsPArenT
7% 13%
resPonsIve
25%
15%
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 8: CoMMunICATIon MeDIuM CurrenTly eMPloyeD
TelePhone
43%38%
FACe-To-FACe
32%25%
25%30%
WeBsITe
0%
7%
100%
80%
60%
40%
20%
0%
ClIenTADvIsor
FIgure 7: CurrenT FrequenCy oF CoMMunICATIon
yeArly
9%17%
quArTerly
45% 46%
MonThly
39%
24%
WeeKly
7%6%
AlMosTnever
0%7%
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 14/21
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 15/21
4 / State Street Global Adisors | Kowledge@Wharto
I the survey is refective o general attitudes, many clients
eel disconnected rom their advisors. Instead o ignoring
clients once they’ve signed on, Anthony believes advisors
should tell them that “part o my value proposition is that
I’m going to pay attention to you.”
The results o both the survey and the ocus group
suggest that advisors need to think about their clients
more on an ongoing basis. As one participant in the ocus
group said, “The act is, I work too hard to put my money
with someone who doesn’t care.”
Ultimately, or advisors, increasing the level o trans-
parency and clarity in communications will help build
trust and improve their ability to develop productive, long
lasting and satisying relationships with clients. The next
section o the report ocuses on a best practices method
or discussing ees that can help advisors to build trust
early on and throughout the relationship.
RESPOnDEnT DETAILS
eall diided—53% to 47%, respectiel. A maorit
said that their ees were egotiable. Thirt-eight percet
said that the were egotiable or all cliets, bt 44%
said that egotiabilit depeded o asset sie. Ol 8%
said that their ees were eer egotiable.
CusToMer resPonDenTs. Cliet respodets were
eall diided betwee people who sed priate
baks or priate wealth maagemet rms (33%);
acial plaers (28%); or broker-dealers (27%). More
respodets worked with large proiders (49%) tha
was represeted i the adisor’s sample.
Most respodets paid or acial plaig/wealth
maagemet o a percetage o assets basis (42%),
bt commissio ol was also poplar (23%). Fees are
bdled or most o them (62%). Few egotiated their
ees with their adisor (74% did ot).
More cosmers had portolios o less tha $500,000
(48%), bt more were oer $5 millio tha represeted
o the adisor side (6% reported portolios o oer
$5 millio). The remaider ell ito the $500-999K
(20%) ad $ millio to $5 millio (26%) categories.Most did’t pa perormace ees (7%) or did’t kow
whether the paid a perormace ee (22%).
FoCus grouP. A ocs grop o afet iestors
who had respoded to the sre was moderated b
a proessioal moderator. The discssio was held i
new york Cit i jl 2006.
A total o 866 idiidals completed the State Street/
Kowledge@Wharto olie sre, which was held
betwee je 4 ad je 29, 2006. Two idetical sre
tracks (i.e., lies o estioig) were preseted to each
grop, which iclded: () 500 Cosmers ad (2) 366
acial adisors. Fiacial adisors comprised a wide
rage o iestmet ad acial serice proessioals,
ad cliets represeted a eall wide rage o portolio
sies.
ADvIsor resPonDenTs. O the adisors, 42% o respo-
dets were proiders o acial or wealth maagemet
serices; 30% worked or a priate wealth maagemet
rm or a priate bak; 28% were acial plaers; ad
6% worked or a wirehose. Sies were also diided
almost eall betwee large (32%); small (25%); ad
botie (29%). The ol derrepreseted segmet
was adisors at mid-sied rms (4%).
Adisors represeted a srprisigl broad cross sectio o
the bsiess. Media accot sie or the oerwhelmig
maorit o respodets was $5 millio or less. Respodets
agai were diided almost eall betwee accots o
less tha $500,000 (33%); accots o $500,000-$999,000(30%); ad accots o $ to $5 millio ( 25%).
Amog the 360 proiders, 58% charged a percetage
o assets, 2% charged a ee pls commissio. Eight-
see percet said the did ot collect a perormace
ees.The remaider was diided almost eall betwee
fat ee (5%); commissio ol (6%); ad fat ee b
proect (0%). Bdled ees ad bdled were abot
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 16/21
5
III. Adi Bt Pactic: Bidi Tt wit t F Dici
Frank also tries to keep ee discussions very clear. “I like to
put them all out on the table including our own potential
conficts, and I like clients to be really pragmatic in their
search.” He also has them ask the competition some
key questions: What’s your retention rate? How many
clients do you actually serve or try to serve? What’s your
perormance?
Frank says he always tells prospective clients, “Either
we’re the best or the second best choice or you. The
other choice is themselves...They could go out and put
together an array o index unds and do it themselves,
and the cost would be less. “They generally appreciate
the candor,” he says.
The successul advisors interviewed or this study arm
that the clearer and more direct the advisor is about ees,
the better. “Talking about ees isn’t always the most
comortable thing, but i you say it as a matter o course
and that’s the ee, clients are usually pretty accepting,”
states Glenn Frank.
Among ultra-high-net-worth investors, this already seems
to be the case. “My experience with investors and
nancial proessionals is that, increasingly, a discussion
o the business model is beginning to be held at the
beginning o the courtship,” says, Beyer o IPI.
As or ees, it’s
clear that obod
wats to talkabot them; bt
eperts ad the
sre propose
that there is a
high price to be
paid or aoidig
the sbect.
Years o perceived conficts o interest have made some consumers suspicious that their
nancial advisors are truly there to help them. As the survey and the ocus group results
demonstrate, some clients are in act alienated rom their advisors. “I’ve gotten to the
point where I listen to their spiel, but not really, because I really just don’t believe it,” saidone participant in the ocus group.
As or ees, it’s clear that nobody wants to talk about them; but experts and the survey
propose that there is a high price to be paid or avoiding the subject. They say a lack o
transparency about ees negates trust on all levels. Bradlow says that the survey suggests
advisors may even talk themselves into thinking that they have discussed ees enough,
when in act they haven’t. Dr. James Grubman, psychologist and consultant to wealth
managers and high net worth amilies, concurs that many times advisors avoid ee
discussions due to their own anxiety about the outcome. So, what is the right way to talk
about ees with prospects and clients?
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 17/21
6 / State Street Global Adisors | Kowledge@Wharto
Candor has paid o or Frank in more direct ways as well.
Frank relays that once he even had a client ask to be given a
higher ee, ater he had rst inquired about a ee reduction.
“We can do a lower ee,” Frank told him, “but you’re probably
not going to be the rst call that I answer.” In response, his
new client changed his mind and said he’d pay more. “You
get what you pay or—and he wanted to get more, so he paid
more,” Frank recalls.
I possible, most successul advisors interviewed believe a
single, simple ee schedule is usually the best way to go.
Besides appealing to clients, that kind o simplicity pays
other dividends as well. Jeannie Gibson Sullivan o Back Bay
Financial Group in Boston, remembers that at one point, her
rm oered 13-15 dierent ee structures. Now they have
one, on a single sliding scale. “It’s a lot simpler and it’s a lot
easier to automate.”
To help ensure that the client is perectly clear about the
ees, Patrick Carrigan, a senior investment management
consultant at Smith Barney in Dallas, reveals that his team
has put together a chart that shows what his rm’s oerings
cost and what their competitors’ oerings cost. Clients
have really responded well to the chart, he adds. “It’s been
extremely well received. It’s one o the most powerul things
we’ve done—it deuses the ee question right o the bat.”
FOuR STEPS TO SuCCESS WHEnDISCuSSInG FEES
According to Dr. Grubman, there is a lesson to be learned
rom these advisors’ approaches and, specically, rom
Patrick Carrigan’s method. He rmly believes all advisors
have it within their power to replicate Carrigan’s success.
“It’s a matter o developing procedures that really work,”
says Grubman. Just as doctors can be taught how best
to deliver dicult news to a patient, he says, so too can
advisors be taught how to best talk about ees. “The
discussion about ees has at least our components to it. I
you don’t ollow these pieces, it can go badly. I you ollow
all the components, then it goes well,” says Grubman
He describes a recipe o sorts or the ee discussion,
identiying the active ingredients necessary or successu
conversations about ees that oster client trust.
. DOn’T PROCRASTInATE
One key ingredient is to simply disclose. Advisors would do
well to tell clients what their ees are in as straightorward
a manner as possible. “The reality is,” says Grubman
“many advisors are really nervous about this.” They ea
that they will be put in the position o having to deal with
a negative or contentious response rom the prospect
or client. He oten nds that advisors don’t tolerate thei
own anxiety all that well and this causes them to avoid
the ee discussion as long as they can.
“I I don’t tell you how many basis points I’m going to
charge,” says Grubman, “we can’t ght over it. I I do
tell you, you might want to ght, and I don’t know how
to handle that. So instead I’m going to avoid the whole
thing.“ The advisor’s discomort with assertiveness is a
huge issue in communication skills.
In pointing to Carrigan’s success, Grubman notes “Jus
simply the act that the rm didn’t avoid and dealt with it
openly is an active ingredient. They didn’t procrastinate
They didn’t avoid. They did it—they disclosed.”
2. DESCRIBE FEES WITH CLARITy
Setting up ees simply and describing them clearly is a
critical second ingredient, asserts Grubman. “Advisors
oten mess this up, because out o their own anxietyor their own issues about ees, they will obuscate
They think that they are being specic in showing all the
shades o gray with ees. In reality, clients do not wan
shades o gray. They want it pretty black and white.”
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 18/21
7
For many reasons, advisors oten get incredibly detailed when it comes to describing ees. Instead o clearly stating a
ee o 70 basis points, or example, they’ll talk about the ranges in ees they charge or various types o clients. They may
then urther cloud the ee discussion by talking about an array o special circumstances that may or may not drive urther
modications in ees. Though the advisor may be well-intentioned in doing so, Grubman says that oering an excessive
variety o contingencies actually erodes trust. What advisors perceive as detailed disclosure o shades o gray, explains
Grubman, “is experienced by clients as loopholes, udging and being untrustworthy.” Intricately detailed ee menus just
contribute to ambiguity and generate mistrust, warns Grubman, so communicate ees directly with clarity.
3. PROvIDE COnTExT—BEnCHMARK FEES
Providing clients with context by benchmarking your ees, says Grubman, is the third step to
success in the ee discussion. Patrick Carrigan is immediately able to convey trustworthiness
and credibility by giving his clients a chart that not only discloses what his ees are but what
his competitors’ oerings cost. “Because i I know that the range o oerings typically is
somewhere between 0.95% and 1.3%, and you quote me 1.25%,” says Grubman, “at least
I know we’re in the range.”
Advisors are acutely aware o industry ee schedules and what their competitors may be
charging. However, many wealthy individuals do not know whether a ee being charged
“is good, bad or indierent”, according to Grubman, and that is unsettling or them. Money
and the ees charged or money management are not a water-cooler topic o conversation
or most wealthy clients. For a host o reasons, people can be rather secretive, preerring
not to talk with riends or acquaintances about their wealth or what they pay or services.
Context is key, according to Grubman, particularly or those clients who are working with a
trusted advisor or the rst time.
Market research demonstrates that embedding inormation in context actually conveys more
than i you deliver data without context. Grubman points to the Energy Eciency Rating on
appliances as an example o how context adds value. The eciency rating conveys not just
what the estimated annual operating cost is o the appliance you’re thinking o purchasing,
but also a comparison scale o that appliance against other models and brands. It shows
you exactly where your appliance alls within the ull range o possible ratings, giving the
consumer a much better vantage point rom which to evaluate the product.
What adisors
perceie as
detailed
disclosre o
shades o
gra, eplais
Grbma,
“is eperieced
b cliets as
loopholes,
dgig
ad beig
trstworth.”
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 19/21
8 / State Street Global Adisors | Kowledge@Wharto
There are ultimately a huge number o ways advisors can
communicate ees to clients these days. The ideal manner,
contends Grubman, would be to very clearly present up-
ront what the typical industry rates are or the advisors
type o rm, or a client’s particular net worth, or or a
specic category o client, etc. As Grubman points out,
Patrick Carrigan doesn’t just tell clients what his rm’s ee
is—he presents his ee in context with the range o ees
industry-wide. “Yes, this is scary,” recognizes Grubman.
“You may have to justiy your ee to the client i it is on
the high side. But, ultimately this is better than hiding
behind a lot o gures and then having the client nd out
later anyway.”
“So when we talk about what my ee is compared to
others, I’ve told the client many things. I’ve said ‘Look,
I’m honest. Look, I’m consistent with industry rates.’
Plus, I’ve educated you,” states Grubman. By providing
the client with inormation in context, he says, the advisor
conveys trustworthiness and provides real value to the
prospect or client.
4. PuT IT In WRITInG—GIvE CLIEnTS SOMETHInG
TO REFER BACK TO
Finally, advisors would do well, Grubman adds, to put
their inormation about ees in writing, because generally
people don’t retain inormation all that well in a ace-to-ace
meeting. “We know people simply don’t remember hal o
what goes on”, he says. So, what an advisor says to a client
is almost never what the client walks away remembering
This phenomenon explains both the discrepancy in
perceptions about ees revealed by the survey, and
also where mistrust can sneak into the relationship. An
advisor may know he told a client the ee was 90 basis
points with one exception. The client remembers it as
90 basis points, no exceptions. Both parties, then, begin
to think that the other is being untruthul or trying to get
away with something should a disagreement arise.
Grubman points out that there are a lot o lessons to
be learned rom the medical eld and that a host o
similarities exist between the advisor-client and doctor
patient relationships. In the medical eld, or instance
a lot o procedural training takes place around how toprescribe medications. Doctors are being trained to ask
patients to repeat back instructions regarding when and
how to take their medications, or the reason that patients
simply do not retain inormation well.
Why Carrigan’s method works, asserts Grubman, is tha
he gave them a chart they could take home with them
“So i they orget or they’re not sure, they can reer back
to something and say, ‘Oh, yes, that’s right, they said it
[the ee] was 1.25%.’”
I advisors want people to retain important inormation in
detail, says Grubman, they must write it down: “Written
and visual lasts. Oral and verbal fies away.”
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 20/21
9
FOCuS On THE PROCESS, nOT THE FInAL COnvERSATIOn
Ultimately, where many advisors ail in building trust about ees, says Grubman, is by ocusing only on the end o thediscussion—or on the conrontation they ear will ensue once they tell the client what the ee is. “Everybody is ocused
on that last segment o the conversation,” says Grubman. “In actuality, i you haven’t done the component pieces the
correct way leading up to that point, how are you going to have that last [bit o the] conversation? It’s liable to go wrong
in a zillion ways.”
According to Grubman, competence in the ee discussion can be achieved easily when there
is a well-dened, repeatable roadmap or the conversation. By ollowing the aorementioned
steps, which are independent o who the client is, says Grubman, advisors build trust and
place themselves in a more capable place rom which to address client-dependent variables,
such as the client’s personality or situation in lie. That is the bottom line in the relationship:
responding well to a client’s concerns, states Grubman. Here is where the advisor must
be equipped with the communication skills so integral to the “relationship competence”
discussed earlier.
COnCLuSIOn
Ultimately, the nancial advisory business is changing and becoming more transparent.
Wharton experts, as well as those like Dr. Grubman and successul nancial advisors
themselves, say that this way o doing business is better or the client as well as the
advisor, in that it tends to build a stronger, longer-lasting relationship. But as the State
Street / Knowledge@Wharton survey suggests, doing business in this way may require
un-learning behaviors and attitudes, and acquiring new methods or communicating
eectively and openly with clients. “What is needed,” states Grubman, “is a paradigm
shit. And it’s happening.”
In a world where investment solutions and services are becoming increasingly commo-
ditized, experts agree that, or advisors, the extent to which they can act as trusted
counselors and educators to their clients will be the real dierentiator or measure o value.
And the surest way to build trust, according to Wharton aculty and other industry experts,
is by demonstrating through one’s actions and words competence in three critical areas:
knowledge, ethics and perhaps most importantly, interpersonal communications.
Accordig to
Grbma,
competece
i the ee
discssio ca
be achieed
easil whe
there is a
well-deed,
repeatable
roadmap or the
coersatio.
8/3/2019 Wharton Financial Advisor - Client Relationship
http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 21/21
ttp://www.afd.cm
ttp://kwd.wat.p.d
This material is or your private inormation. It is subject to copyright o State Street Corporation with all rights reserved and
may not be reproduced without the prior express written permission o State Street Corporation. The views expressed are
the views o State Street Global Advisors as o the date the material and are subject to change based on market and other
conditions. The opinions expressed may dier rom those with dierent investment philosophies. The inormation we provide
does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy
or an oer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status
or investment horizon. We encourage you to consult your tax or nancial advisor. All material has been obtained rom sources
believed to be reliable but its accuracy is not guaranteed There is no representation nor warranty as to the current accuracy
For ther iormatio, please isit:
Special Report
Bidi t Tt Diid:The Financial Advisor-Client Relationship