The Big Advisor/Client Gap

August 15, 2019 At the upcoming Wealth/Stack conference, you’re going to be talking about the challenges of communicating portfolio performance to clients. What's the disconnect between what the advisor communicates and what the client hears?

Egan: There are quite a few different components. First, whenever an advisor is coming into the conversation, they're thinking about expected returns and historical returns. Any given year, average returns might be, say, up 20%, or down 7%. But these numbers don’t tell the client how that performance fits in their overall financial plan. There’s a gap in knowledge and language between how the advisor is thinking about it, and how the client is thinking about it.

A big part of why I left my previous job (and moved to Betterment) was that we were doing a lot of behavioral design stuff, but we could never change the way client statements were presented. We could never change the way the web portal sent out quarterly investment statements that didn’t reference the client’s financial plan at all. At Betterment, regarding the technology we use to speak with clients—especially when we’re not around—their web portal, has that in mind.

One of the biggest problems advisors have isn't they don’t understand investment theory or financial planning or behavioral components. It’s the technology. The medium through which they communicate and work with clients continues to look like it did 40 years ago. Advisors set up a financial plan with the client, and then the next quarter, the client gets a quarterly investment performance sheet that tells them about what went up and what went down at an individual level. It has nothing to do with their financial plan as it’s presented to them.

What's going to be interesting at this conference is that we’re going to finally start talking about having technology and design that more accurately reflects the conversation, instead of simply reflecting what your investments do over the past quarter. Why is dealing with the messaging so important? Is this incomplete picture of performance leading clients to make poor decisions thereafter?

Egan: A famous economist once said, “What you see is all there is.” We’re extremely prone to focusing on whatever is put in front of us, rather than taking a step back and saying, “What are the big things I should be paying attention to?’ If we’re constantly showing people the recent history of their accounts, when they start judging advisors by their recent performance rather than their progress against their financial plan, that’s us doing disservice to ourselves.

The biggest issue is that, when we report performance, it feels informative because it’s fact. But there are zero decisions you can make off the back of it that would make you better off in the future. You see, “I underperformed the S&P 500 last month,” but what good decision are you going to make with it? Do you double down on it? Or do you sell out of it? Technology and design can help us change the message. What do you hope people will take away from Wealth/Stack?

Egan: The industry is changing, especially with how and where people get compensated. It’s exciting, because the changes in technology and design mean the good financial advisors now have a lot more of a fighting chance to become good sustainable businesses on their own. They don’t need to scale up into big roll-ups or anything. Technology will make all the difference.

Contact Cinthia Murphy at [email protected]

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