Why advisers shouldn’t worry about market volatility impacting client relationships
By Samantha Lamas, Behavioural Researcher
Trust is an essential asset for advisers to have with their clients—some would argue it tops the list.
Given current market conditions, some advisers may worry that the portfolio swings that clients are experiencing can erode trust in their relationship. Based on our research, however, adviser-client trust is driven by more than just returns or short-term portfolio performance. Yes, trust is a delicate thing, but if it’s built on a strong foundation, then it shouldn’t be shaken by the unavoidable ups and downs of markets.
Where trust comes from
In previous research, we looked at the drivers of trust in the adviser-client relationship by examining 18 different adviser behaviours, ranging from whether or not they have “similar values as their clients” to whether they “take the time to explain their decisions” to clients. Each of these behaviours falls under six factors commonly referred to in trust-related academic literature:
- Communication
- Expertise
- Personalisation
- Shared values
- Concern
- Integrity
After running a survey with 588 individuals, we found that the three most impactful behaviours when developing trust in the adviser-client relationship were:
- “When my adviser acts in my best interest”
- “When I see that my adviser is knowledgeable”
- “When I believe that my adviser understands my financials goals”
It’s important to note that an adviser acting in a client’s best interest ranked far above the other behaviors in terms of importance. In other words, trust is largely driven by following the best-interest standard, not returns. In fact, the role of returns in many aspects of the adviser-client relationship may be overestimated. For example, a research paper in 2019 looked at the decisions to hire or fire a financial adviser during the Great Recession and found that a decline in wealth did not have an impact on firing decisions. Although firing decisions aren’t the same as maintaining trust, no doubt they are related.
Set expectations for the relationship early and often
Although it’s easy to blame a strain in a relationship with a client on market volatility and lost portfolio value, research suggests that lost returns may not be the blame. Instead, the strain may be the result of uncalibrated expectations. In other words, if a client’s trust in their adviser is dependent on returns, then the adviser may have inadvertently sold that client a false narrative.
Every financial professional knows that market volatility is inevitable, and every portfolio will have its ups and downs. But not all advisers may effectively communicate that to clients. Instead, some clients may misunderstand market volatility and how it impacts their investments. Volatility is inevitable, and even well-constructed portfolios go through large swings, even though they still may be on track to meet the long-term financial goals of the client.
To prevent this instance of miscommunication, advisers can consider incorporating the following talking points at the beginning and throughout their relationship with a client:
- It’s not if market volatility will occur, it’s when. Market ups and downs are unavoidable, all investors can do is make sure their portfolio is diversified, robust, and tailored to their long-term goals.
- Have a conversation with your clients regarding your commitment to the best interest standard and what that means for your relationship with them and their money. For example, explain that as part of that standard, you are monitoring their portfolios and will advise them if any changes are necessary that serve their interests alone.
- Consistently remind clients that the metric for success is achieving their long-term financial goals, not a return percentage nor beating a particular benchmark. Clients may need more reminders during times of volatility, but as research shows, people can be made less sensitive to losses by paying attention to long-term performance as well as their goals.
Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.
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