What investors want and what advisors think they want can sometimes differ, so getting everyone on the same page could bode well for your client relationships and practice.
Matt Lobas: I have a question for you and it’s really an important one: Do advisors really know what their clients want?
I’m Matt Lobas, and this is The Essential Practice podcast.
Though financial advisors work to help their clients in any way they can, sometimes there’s a disconnect that can lead to challenges in the advisor-client relationship.
In this episode, I’m talking with Ryan Murphy, Head of Decision Sciences for Morningstar Investment Management. Ryan will provide us with some insights on the findings of a study he authored, titled The Value of Advice: What Investors Think, What Advisors Think, and How Everyone Can Get on the Same Page. Ryan, I want to thank you very much for joining us today.
Ryan Murphy: Of course. My pleasure.
Matt: Let’s get started. I wonder if you can share with our audience a little bit your background and your role there at Morningstar?
Ryan: Sure. So I’m a behavioral scientist who studies how people make decisions about risk and money.
So I have an interdisciplinary background. I bring together methods from experimental economics and psychology, all to try and understand better when people are rational, when they’re not perfectly rational, and the sorts of things we can do to help them make better choices.
Matt: Great. I wonder if you could share a little bit with our audience today about the study that we’re talking about.
Ryan: Well, it started with a very simple question, which is what do investors look for when they hire a financial advisor?
And we thought it would be particularly interesting to ask the same sort of question to financial advisors at the same time: What you think that people are looking for when they hire a financial advisor?
And so then we put together a set of attributes and then looked at how people made these choices and where there is a match between what people are looking for and what advisors expect and where there is a mismatch.
Matt: Can you talk to us about the process that you undertook and how you selected the advisors for your study and also how you selected those investors that gave you the responses?
Ryan: Sure, so these were advisors who had worked with us, and so they volunteered to take part in the research and also got a preview of the results.
For the population of investors, they were paid up a little bit of money for participation and then were also able to see some of the results.
Matt: Well, you know as a behavioral scientist, you must have had some preconceived notions. What did you think advisors and investors kind of would agree on and what they might disagree on, and what were you thinking early on about what the results of the study would be?
Ryan: Well, this was a bit more exploratory, but I had the inclination that people would see goals as a major reason that they were interested in getting financial advice and that’s bore out in our study.
So that’s one of the top things people are looking for when they seek advice from a financial advisor is someone who can help them reach their financial goals, and that was nice to see.
I thought also that people would be interested in behavioral coaching. That’s one of the things that we look at a lot in behavioral science, the sorts of things where, for example, an advisor could help the client stay in control of their emotions.
It turns out that was dead last of what investors were looking for. That was a surprise to us.
Matt: Okay, so you had a preconceived notion about what the study would say. You sat down, I know you analyzed the data. Can you share with us what some of the main findings were?
Let’s start with saying where did investors really see value in the advisor? What were some of the attributes that you discovered?
Ryan: So when people are looking for a financial advisor, they’re looking for someone to help them reach their financial goals. They’re looking for someone who has relevant skills and knowledge. These are the top two attributes that investors had selected. And they’re also looking for someone who’s good at communication.
Matt: So let’s flip the coin over for a moment. Where were there points of disagreement between the advisor and the investor?
Ryan: Well, one of them had to do with personalization.
So personalization was something that advisors were anticipating people would be in large demand for, but it turns out that investors seemed a little bit less interested in this than advisors had predicted and we thought that was notable.
And I think that’s a little bit of a misidentification of where value comes from. I think that personalization can be extremely valuable in the financial planning process. I think it’s worth highlighting to investors of the ways in which that can help actually create value for them and their unique situation.
There’s an additional wrinkle here.
One of the other things people said that they were looking for was an advisor who could help them maximize their returns. And this one for me was a head scratcher because they say that they want to have someone who helps them reach their financial goals and concurrently helps them maximize returns and those are really different things.
I think that is worth a conversation early on to help an investor understand what the purpose of their portfolio is. Many portfolios are well designed and are going to help a person reach their financial goals, and they’re explicitly designed not to maximize returns, and that’s okay.
Matt: In your opinion, what were some of the lessons learned that advisors can take away from your study to build a better practice and to really help their investors more?
Ryan: Well, we do know that behavioral coaching is one of the most valuable things advisors can provide for their clients.
Being able to help people understand what’s going on in the market and being able to stay in control of their emotions, not flee the market, not panic sell, and also maintain their contribution rate over time. All that’s extremely valuable and that often falls under this rubric of behavioral coaching.
Yet when you start to talk about an advisor helps people stay in control their emotions, people didn’t really like that as much.
So we ran a follow-up study where we were looking at how can we talk about behavioral coaching in a way that was more palatable, or more interesting, to folks.
And so we tried different phrases, and one of the phrasings we found that was particularly useful is saying “an advisor could help me avoid common behavioral mistakes” or “help my portfolio from excessive emotional reactions.”
Now that might sound really similar as the “helps people stay in control their emotions,” but it turns out that by just changing that phrasing a little bit, people are much more interested in that attribute.
And I think that’s a really easy thing to implement as we talk about behavioral coaching, using verbiage that helps people find it more appealing.
Matt: You know, it’s interesting, you raise the idea behavioral coaching. Any thoughts that you can share with our listening audience out there about the best way to get better at that skill set?
Ryan: Well, we’re starting to think about how can we nudge people to make better choices. And often that’s where a person’s thinking through the choice and they don’t have to be educated years in advance, but in that one moment where they’re making the choice, an advisor can provide them the right way to think about the problem, the right frame for it, the right piece of information that helps them make a good choice.
I think that kind of approach where we think about how to help people make more rational choices, in spite of the fact that we’re not wired to be rational.
Matt: Given what you said, how you communicate to your client—the tone that you use, the words that you use, etc.—would be very important in that process. What would that be a fair statement?
Ryan: Absolutely, and I think it’s also worth noting that different clients are coming at this from very different places.
So I think one thing that financial advisors can do well is listen carefully to what their clients are trying to accomplish and try and understand where they’re coming from.
One of the other pieces of research we’ve been looking at is trying to understand people’s goals, and sometimes if you ask an investor just off the top of their head what your overarching financial goal is, they won’t really know the answer.
And we’ve developed some processes that can be used by advisors to help people better understand what’s driving them as an investor and come to, I think, a more real representation of what they’re trying to accomplish.
Matt: You know, I find that fascinating. Thank you for sharing that with us, but I also want to thank you, Ryan, for sharing your insights on this topic today.
And I’d like our listeners to know that if you’re interested in getting a copy of the study that he’s been talking about today and all of the details that it provides, I’d invite you to please contact your partner here at Wells Fargo Asset Management.
Ryan, I can’t thank you enough. Thanks for joining us today.
Ryan: Of course. My pleasure to be here.
Matt: I’m Matt Lobas and I want to thank you for listening to The Essential Practice podcast.