<img height="1" width="1" style="display:none;" alt="" src="https://dc.ads.linkedin.com/collect/?pid=529113&amp;fmt=gif">
login-iconLog in   Schedule a Discovery Call

How Financial Advisors Build Useful Behavioral Momentum with Clients

By ClientWise | March 23, 2013

Each quarter, Russell Market Research compiles the Financial Professional Outlook, the collected opinions of financial advisors from national, regional, and independent advisory firms on topics of market sentiment, advisor/investor conversations, and investor behavior.


In the latest Q1 survey, they bring forth a number of juicy topics that seem worthy of reflection and contemplation by financial advisors and investors alike.


A perceived gap between financial advisor and investor optimism.

  • In February 2013, 72 percent of advisors were optimistic, versus just 21 percent of investors.
  • The fact that there is a 50+ percent gap between advisors and investor sentiment is not unusual. Over time, advisors ALWAYS seem to be much more optimistic than investors, by 40-50 percent in each quarterly time period. I wonder, is this because advisors have a tendency to be Pollyanna-ish, or do investors have a propensity to always think like Eeyore?
  • One other thought on this sentiment index. It is through the prism of the financial advisor. In other words, advisors were asked the question, “How optimistic or pessimistic are your clients about the capital markets over the next three years?” I’m not drawing any conclusions about the accuracy this methodology, but it makes me wonder. Would these numbers be appreciably different if the investor was asked directly?


Differences in market sentiment by generation.

  • The older the client is, the more pessimistic they seem to be. 42 percent of the Silent Generation is pessimistic regarding the markets today, 23 percent of Baby Boomers are pessimistic, and 13 percent of Gen X is pessimistic. Of course it’s not at all surprising that older generations, who’ve seen two speculative bubbles in the markets over the past 15 years, would be more wary on the markets.


Gap between investor perception of market performance and actual market performance.

  • This is pretty striking and disconcerting. When investors are asked how the markets performed in 2012, many said “down” or “flat”…a response that is greatly influenced by scary headlines, most likely. Belying investor gloom, the markets are actually doing pretty well over the past 15 months. The Russell 3000 was up 16. 4 percent last year, and YTD returns are up 10.1% (as of 3/22/13).


What investors say they are concerned about.

  • In topics of conversations that are initiated by investors, “Concerns about government policy” is far-and-away the most prevalent, with 63 percent of advisors saying this was the #1 topic on investors minds. “Market volatility” and “generating income” came in a distant 2nd and 3rd. Again, given the near-constant barrage of headlines emanating from Washington regarding the gridlock du jour, it is hardly surprising that this concern is top-of-mind for many investors.


Investment Policy Statements

  • The experts at Russell seem to be big proponents on financial advisors using investment policy statements (IPS) as a benchmark of a client’s risk and return objectives, and a touchstone that should be referred to on an ongoing basis in the advisor/investor relationship.
  • The real value of an IPS is that it frames a point of reference when, in the future, investors want want to deviate from the mutually agreed-upon investment policy. 
  • Only 39 percent of financial advisors use an IPS with all of their clients.
  • The majority of investors who wanted to deviate from their IPS in 2012, wanted to decrease their exposure to risk assets (60 percent).
  • Sadly, the reason most often cited by investors for IPS deviation was “information that they received from non-professional sources, e.g. the media, family, friends, etc.”


Some Final Thoughts

  1. Investment policy statements seem to be a really powerful commitment device that allows investors to stay on track toward their investment goals. The mere act of establishing and committing to an IPS builds a behavioral momentum that seems to contribute to long-term investor success.
  2. The role and value of the financial advisor in this entire process becomes readily apparent. To the extent that an advisor collaborates with investors to co-create an investment policy statement that guides risk and return objectives, and refers to the IPS when the investor succumbs to the drumbeat of gloomy headlines, would seem to be a subtle and invaluable benefit provided by the financial advisor.
  3. There are really interesting parallels regarding the IPS used between financial advisor and investor, and the coaching agreement that is co-created between an ICF-credentialed coach and a coachee. However, this is an important topic that we will come back to on another day.
For additional ideas on how you can create your unique wealth enterprise, download this helpful ClientWise Learning Tool:
8 Wealth Management enterprise

Topics: Business and Operations Management Learning Investing

Leave a Comment