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You and your adviser don't always see eye to eye

Steve Wendel  |  25 Mar 2019Text size  Decrease  Increase  |  
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If you were to list the characteristics of an adviser you'd find most valuable, what would be at the top of your list?

I bet it would be things like helping you reach your goals, having the appropriate skills and knowledge for the job, and communicating well.

At least, those were the characteristics that scored highest on a recent study Morningstar's behavioural science team conducted.

But do financial advisers correctly understand what investors are looking for? And do the perceptions of advisers and investors line up with research studies about the value of advice?

In both cases, our study showed there's a disconnect between what investors value and what advisers think investors value - and that's a problem. 

Let's review these disconnects and discover how investors can begin to bridge the disconnect.

About the Study

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In this study, Sam Lamas, Ryan Murphy, and Ray Sin surveyed investors to ask them a simple question: What do you value most when selecting a financial adviser? And, similarly, they asked advisers: What do you think investors value most when working with a financial adviser? Each group was presented with a list of 15 options to rank (for comparability) that covered the major attributes: from knowledge and skills to maximizing returns, giving unbiased advice, or using up-to-date technology. The participants ranked each of the options, from first to 15th.

Disconnect 1: Investors and advisers

In many areas, the investors and advisers were aligned: "Helps me reach my financial goals" was No 1 for investors and No 2 for advisers. Similarly, "Communicates and explains financial concepts well" was No 3 for investors and No 4 for advisers.

The differences, though, were intriguing.

First and foremost, investors, on average, ranked "can help me maximise my returns" near the top (fourth), while for advisers, that was almost at the bottom (14th out of 15).
Personally, I see that as a real problem. Why? Because it means that a significant subset of investors may be expecting their advisers to take on inappropriate levels of risk or to handpick stocks in a likely fruitless effort to beat the market. Those investors are either likely to be disappointed by their adviser (in aggregate, we can't all beat the market) or by what happens when risk's downside is felt. A more thoughtful approach is often to focus on goals and what's required to meet them.

What investors value Mornignstar

Source: The Value of Advice: What Investors Think, What Advisers THink, and How Everyone Can Get on the Same Page, Morningstar Investor Success Project

Disconnect 2: Perception versus independent research

There was another big difference that's worth talking about. Investors ranked "helps me stay in control of my emotions" and "acts as a coach/mentor to keep me on track" at the bottom: 15 and 13, respectively. Advisers ranked those two points considerably higher, at 7 and 11.

Based on a variety of independent research studies, investors are significantly underestimating the importance of these factors. According to studies by Vanguard[1] and others, the single most important service that advisers provide for their clients is behavioural coaching: helping clients manage the ups and downs of the market and their financial lives, without unduly changing their investment strategy. Behavioural coaching beats tax management, rebalancing, asset allocation, and product allocation.[2] Advisers, and especially investors, aren't focusing on what matters most, which is likely to hurt investors in the long run.

What does this mean for investors?

One lesson from this research is that investors shouldn't assume a particular adviser knows what is important to them. Investors and advisers normally talk about the client's goals, of course, and investment strategy. But if an investor really cares about having an adviser that is easy to get a hold of, there may be a misalignment. The safest strategy is often simply to be clear up front: "In addition to meeting my goals, this is what I find important..."

This research also means that we're probably all a bit overconfident. A range of research studies has shown that investors sometimes struggle to stay the course. But, it's far easier to believe that other investors will get into trouble than it is that we ourselves will. It's human, it's understandable, and it's also a problem. Personally, I look to Ben Graham's famous quote for a blunt reminder of the challenge at hand: "The investor's chief problem--and even his worst enemy--is likely to be himself."

No matter how long I study investing, and behavioural finance, the risk that I'll be my own worst enemy as an investor doesn't go away. As investors, we don't always need a coach (sometimes our potential coach needs just as much help as we do). However, I think we're better off when we recognise that we, too, might struggle to manage our emotions and stay on track during volatile markets.


This study is part of the Morningstar Investor Success Project.

[1] Kinniry, F.M., Jaconetti, C.M., DiJoseph, M.A., & Zilbering, Y. 2014. "Putting a Value on Your Value: Quantifying Vanguard Advisor's Alpha." The Vanguard Group. 
[2] Blanchett, D., & Kaplan, P.D. 2018. "The Value of a Gamma-Efficient Portfolio" J. Retirement, Vol. 5, No. 3, P. 32.
Merrill Lynch. 2016. “The Value of Personal Financial Advice.” White Paper. 

is Morningstar’s head of behavioural sciences.

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