In Practice July 23, 2019

Advisers Need to Create Exceptional Client Experiences: Cerulli

Investors compare the service they receive from wealth management firms to the type of service they get from consumer goods and technology behemoths.

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To remain competitive, advisers need to totally rethink the way they service clients, according to a new report from Cerulli, “Client Communications: Built on Trust, Nurtured by Strategy.”

To deliver exceptional client experience, an adviser’s strategy must incorporate creative client segmentation, intergenerational engagement, gestures of recognition and appreciation and holistic financial planning, Cerulli says.

“Advisory practices compete against firms that consistently deliver personalized experiences, carefully curated to anticipate needs and match preferences,” Cerulli says. “As consumers, investors are inclined to compare their wealth management experiences not against other wealth management firms but against consumer goods and technology behemoths (e.g. Facebook, Apple, Amazon, Netflix, Google) that they regularly interact with for everyday products and services. These firms provide seamless digital interfaces with individualized content supplied on demand, integrating feedback and adapting to each request. To thrive in this competitive environment, advisers must reevaluate how their practice intentionally creates an experience for its clients.”

So, to create client segmentation, advisers should no longer think of tiers of clients, i.e. A, B, C. Instead, they should “build client personas that identify niches within their book of business” such as women who have suddenly become single, either through divorce or the death of their spouse, or a business owner in the Denver area, married with teenage kids.

Cerulli suggests that advisers then take this information and think about what needs and values these niche clients may have and how they would like to be approached. Cerulli suggests that advisers use metrics they already have, such as account size, net worth, age, marital status, parental status, and pair that with intangible metrics such as interests, life stage and lifestyle. To obtain the intangible metrics, Cerulli says that broker/dealers, custodians and other strategic partners can create templates that investors can fill in and that these partners can then share with advisers.

Advisers can then take these client personas and pair them with workflow automation to serve their clients, Cerulli says. Nearly 60% of “experience-centric” advisory practices use workflow automation for client interactions.

With respect to intergenerational engagement, Cerulli strongly encourages advisers to create multi-generational adviser teams so that when a client passes away, there are younger advisers on the team who the heirs already know and likely to remain committed to. “Advisers often struggle to engage younger investors, including clients’ children and heirs, but given their aging client bases, the need to do so is increasingly urgent,” Cerulli says.

In addition, “teaming creates a deeper, more enriching experience for clients through the advisers’ ability to pool resources, specialize and support one another’s client relationships. Clients who work with integrated, effective multi-adviser teams appreciate feeling like they have an entire team of specialists at their disposal.”

With regards to recognition and appreciation, Cerulli notes that many advisory practices hold client appreciation events, but these are usually large gatherings held once a year. Instead, advisers should consider more intimate gatherings on a more frequent basis, such as every quarter. Advisers should also make themselves available to clients in the event of a crisis or emergency that the client faces. One adviser told Cerulli that they will even go to clients’ homes to help them set up their web preferences on their computers and mobile apps. It is the idea that advisers will go above and beyond their typical financial planning services to be seen as a trustworthy partner who is on their client’s side, Cerulli says.

In terms of providing holistic financial planning, 55% of advisers plan to offer more comprehensive financial planning to clients by 2020, up from only 33% in 2013. Cerulli notes that there are a number of tools on the market that can help advisers offer such services, including MoneyGuideOne, MoneyGuideElite and Foundational Planning, the latter from eMoney.

“Experience-centric advisers recognize that client relationships form the backbone of their business and nurturing them requires dedicated acts of appreciation, which can be delivered in various manners,” says Marina Shtyrkov, a research analyst with Cerulli. “By segmenting their client base into client personas, advisers can automate workflows and optimize engagement opportunities.”

In Practice July 22, 2019

Like Their Clients, Advisers Display Many Biases

Advisers are used to addressing their clients’ behavioral biases when it comes to market risks and returns, but a new white paper suggests they need to do more to understand and overcome their own mistakes.

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Too often, due to behavioral biases in action, the risk of a client not achieving a goal is behavioral, not market based, according to a new white paper published by SEI, titled “Coach Through Biases—Yours and Your Clients.’”

The analysis builds on findings from the 2019 SEI Financial Advisor Survey, as well as a recent affluent investor survey conducted in collaboration with Phoenix Marketing International. Penned by John Anderson and J. Womack, both managing directors with the firm, the paper suggests findings from these surveys “fundamentally support the case for implementing a goals-based wealth management framework.”

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“As your clients’ financial coach, you can help them understand that, while the act of pursuing and maintaining risk exposure runs against their instinct to try to prevent losing money, those same instincts can undermine their ability to achieve specific longer-term goals,” the paper explains. “The need for effective coaching is apparent given the results individual investors produce.”

Indeed, as Anderson and Womack write, U.S. investors timed their sales and purchases of diversified mutual funds poorly over the past 10 years, from 2008 through 2018—a period that experienced the great financial crisis and significant market selloff, as well as calm and rising markets.

The paper points to a laundry list of different behavioral biases that impact advisers’ clients, as follows:

  • Availability bias, which is a bias causing investors to judge the likelihood of future outcomes according to past experiences of similar outcomes.
  • Belief perseverance bias, explained as a bias causing people to be unlikely to change their opinions even when new information becomes available.
  • Confirmation bias, through which people seek out confirmatory beliefs, overlooking beliefs that don’t confirm their views.
  • Herding bias, which is the idea that people feel most comfortable following the crowd; they tend to assume that the consensus view is the correct one despite rational evidence indicating otherwise.
  • Hindsight bias, through which people believe they had predicted a particular outcome when in fact they had not.
  • Loss aversion bias, which describes the cognitive bias that the pain of losing is more acute than the pleasure of gain.
  • Overconfidence bias, occurring when confidence in one’s own judgment is greater than the objective accuracy of that judgment.
  • Overreaction bias, which suggests that people are overly influenced by random occurrences and tend to over-interpret patterns that are coincidental and unlikely to persist.
  • Recency bias, or the tendency to believe that what occurred in the past will continue to occur in the future.
  • Regret avoidance bias, or the tendency to avoid actions that could create discomfort over prior decisions.

Advisory clients tend to display some or all of these biases in different proportions, according to the white paper. When it comes to advisers’ own decisions and behaviors, survey results suggest herding is a common bias, along with overconfidence and regret avoidance.

“While herding and confirmation bias would seem like good and easy answers, it is our position that overconfidence plays a major role in the life of many advisers,” the white paper says. “For example, over the years a category known as ‘adviser-as-portfolio-manager,’ also referred to as ‘rep-as-portfolio-manager,’ has evolved in the adviser community to identify the adviser as the portfolio manager for their clients. Many such advisers rarely tout their individual performance on a case-by-case basis, if ever.”

According to Anderson and Womack, separate research based on the analysis of 400,000 accounts over the three-year period ending Q1 2018 found that standard deviations were much higher for these adviser-as-portfolio-manager accounts and unified managed accounts where advisers manage the portfolio. In the unified managed accounts, excess volatility was in large part due to performance of the adviser-managed portfolio sleeve, according to the white paper. On the other hand, portfolios managed by dedicated fund strategists generated both attractive returns and the smoothest ride for investors.

“Fund strategist portfolios also had the tightest performance cluster, whereas [the adviser-driven] models tended to have greater performance dispersion—accounts that generated 20% in additional gains or that lost more than 20% in value,” the paper explains. “The research also revealed that volatility for adviser-as-portfolio-manager accounts was double that of the fund strategist portfolios, where the asset management is outsourced to money management professionals.”

Womack and Anderson conclude that there is “no doubt that portfolios that have significantly higher volatility relative to the markets can increase a client’s anxiety and trigger the impulse to panic.”

“The likelihood of making judgment errors increases if we neglect the impact that biases have on our own thinking,” the paper says. “This neglect can cause you to minimize important information or discount a client’s emotion as unimportant. While many behavioral biases are unconscious, being mindful that we’re all subject to them is a good place to start to help avoid them.”

The paper recommends that advisers check their egos and develop disciplined, repeatable processes that can minimize short-cut thinking. Advisers are also encouraged to make a habit of considering other possibilities and to reframe errors as opportunities to learn and grow, rather than as evidence of incompetency.

“Your role in a goals-based approach is to manage behavior to help clients maximize the likelihood of achieving success,” the paper says. “Among the behavioral tendencies most relevant to the argument in favor of goals-based wealth management is mental accounting, which describes our tendency to segment our wealth attributable to reaching various goals. As behavioral theorists have shown, investors may have multiple attitudes about risk depending on the goal in question.”

As Womack and Anderson observe, for some goals and investment accounts, risk tolerance may be low, while other goals and accounts may be associated with a high risk tolerance.

“For instance, most clients are unwilling to risk capital that has been allocated to their children’s education costs,” the paper reports. “However, they may have other accounts, sometimes described as ‘fun’ money, that they don’t need for lifestyle expenses and invest them adventurously, seeking the highest return opportunities.”

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