Greater expectations

Even though there is almost a year and several thousand points between the gut-wrenching market lows of last fall and the current, increasingly optimistic outlook, many people remain gun-shy. The speed and depth of the fall has created a new resolve, one that has led to a fundamental shift in attitudes across almost every sector connected to the economy.

Consumers are rethinking their spending and retirement plans, governments are stepping in much more forcefully than usual to keep financial institutions solvent and to stimulate their economies, and regulators are tightening oversight of the financial services industry. At the same time, our industry’s professionals are re-examining the fundamentals of building stable investment portfolios and controlling risk.

Since last autumn, I have talked to more than 500 inves-tors in round-table focus groups and in one-on-one interviews, discussing their response to the market downturn. In those conversations, we’ve talked at length about what investors look for from their financial advisors today — and how that differs from the past.

Some of the things that investors seek from their financial advisors have stayed constant. Investors still look for advisors who listen, demonstrate that they care, put their clients’ needs first and provide advice tailored to each investor’s needs. Investors also continue to expect solutions that are drawn from the widest range of offerings.

At the same time, a fundamental shift has occurred, in that investors are now looking for some other things from their financial advisors. Based on my conversations with investors, here are the five new imperatives that are guiding their relationships with their advisors:

> Demonstrate Empathy. Almost no inves-tor has emerged from the market events of last autumn unscathed. Even with the market’s recovery since March, some investors still feel devastated by the impact on their portfolios and their retirement plans.

In many cases, the first priority for financial advisors is to establish a bond of empathy and to tap into their clients’ feelings. Often, clients are unable to listen to their advisor until they first feel listened to.

If you haven’t had an in-depth conversation with a client about how he or she feels, one of the better ways to start a meeting is to say something like: “Many investors have lost sleep because of the market events of last fall. Tell me, how have you been affected by the market over the past while?”

Then, sit back and listen. Encourage your clients to elaborate with phrases such as: “Tell me more about that.”

Sometimes, clients feel better if their advisor talks about his or her own feelings. One advisor I know tells clients: “This has been the most incredibly difficult period in the markets that anyone can remember. I’m truly sorry I was unable to anticipate the decline and protect you from the downturn. But almost no one saw this coming, including some of the very smartest and most experienced people in the investment world.”

And don’t hesitate to let your clients know that this is not business as usual for you.

Some advisors subscribe to the “never let them see you sweat” philosophy: that is, advisors should never show uncertainty or vulnerability when talking to clients. That’s true — to a point. You certainly don’t want to have your clients walking away from a conversation thinking you’re about to have a nervous breakdown. At the same time, I’ve heard clients say that they felt better when they had received an evening or weekend call from their advisor last autumn or early this spring, saying something similar to: “In light of what’s going on in the markets, I’m in today to contact some of my clients to discuss what’s happening and what you should do about it.”

> Provide Guidance And Direction. The second imperative is to provide guidance going forward. Although almost no one is happy with what has happened to their portfolios, as a general rule, investors aren’t blaming their advisors for this event; they see everyone they know in the same boat.

What is causing dissatisfaction among many investors is a sense that their advisor is overly passive and not providing direction on what their clients should be doing now. Today, your clients are looking for guidance on how to move forward. And if they don’t get it from you, they’ll look elsewhere. Even given the uncertainty of today’s environment, you need to sit down and talk to your clients about the different scenarios for the period ahead and the implications for your clients’ portfolios.

@page_break@As part of that process, you need to update your clients’ financial plans or develop them where they don’t exist. One new cause of anxiety for many investors is the sense of being out of control when it comes to their financial future; that is something that a financial plan can help address.

The other thing that most investors look for is an advisor who has an outlook that is, on balance, positive for the mid-term. That doesn’t mean an advisor who is a market cheerleader or who focuses only on positives — it’s important that you are seen as providing a balanced perspective — but many investors are tired of the doom and gloom of the past year and are looking for an advisor who can help create a realistic road map that will get them where they want to go, even if the journey is delayed by a year or two.

> Incorporate Fresh Perspectives. A common complaint among investors is that their portfolios are unchanged since the market meltdown began last autumn. A comment I hear a lot is: “If my portfolio made sense then, given everything that’s changed, I don’t see how it can make sense right now.”

In cases in which your clients are in mutual funds or managed money, of course, their portfolios have been actively managed. In those situations, it’s incumbent on you to help your clients understand how their investments have indeed changed.

In other instances, however, it might make sense to introduce a new element into client portfolios, such as investment-grade corporate bonds. Clearly, any recommendation has to be appropriate, and you never want to make change for the sake of change. But failing to recommend appropriate changes runs the risk that your clients will see you as taking them for granted.

That doesn’t mean you can’t recommend a “stay the course” strategy. But understand that you have to work extra hard to support that recommendation, demonstrating all the alternatives that you considered and the options you examined before concluding that no change is merited.

> Ramp Up Communication. The fourth new imperative for advisors relates to the demand for communication. The events of last autumn have led to requests for more frequent contact. Whatever level of contact clients wanted a year ago, it’s almost certainly higher today. And it’s not just a demand for more regular communication; many inves-tors are looking for more substantive commentary on prospects for the market and for their portfolios.

Many advisors can’t meet this demand simply by increasing the number of meetings and phone calls. New communication vehicles are being used to supplement traditional personal contact — emailing articles, conference calls and casual group lunches in a boardroom, to name just three.

> Address The Issue Of Trust. The final imperative relates to the issue of trust. We all know that trust is the cornerstone of the client/advisor relationship. It’s understandable that the events of the past year have shaken many of your clients’ confidence in your knowledge and capability.

More damaging is the reality that some clients have started to develop niggling doubts about an advisor’s integrity and whether their money is safe, doubts driven in large measure by the Bernie Madoff and Earl Jones fraud scandals. This is especially troublesome for advisors who don’t have a bank logo on their card, with the reassurance that often provides.

In many cases, the best way to deal with this is head-on. You could say to an existing or prospective client: “In light of some recent cases of fraud, it’s understandable that some investors are somewhat concerned about whether their money is safe. Does this worry you a bit?”

If the answer is “ well, actually, just a bit,” the door is open to discuss this. As part of your response, you can emphasize the fact that your clients’ money is held by third parties. Madoff and Jones had gotten clients to write cheques directly to them.

The events of last autumn have caused investment managers to re-examine their practices and adopt new approaches. In a similar vein, to be effective, investment advisors fundamentally need to rethink their approach to client communications, bearing these five new imperatives in mind. IE

Dan Richards is president of Strategic Imperatives Corp. in Toronto. For Dan’s video comments on IE:TV, visit
www.investmentexecutive.com.