Wharton Financial Advisor - Client Relationship

8/3/2019 Wharton Financial Advisor - Client Relationship

http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 1/21http://www.ssgads.com • http://kowledge.wharto.pe.ed

Special Report

Bidi t Tt Diid:The Financial Advisor-Client Relationship


http://slidepdf.com/reader/full/wharton-financial-advisor-client-relationship 2/21

Tab f Ctt

I. A Matter o Trst 3

Three Leels o Trst 3

Trst i Techical Competece & Kow How 3

Trst i Ethical Codct ad Character 4

Trst i Empathic Skills ad Matrit 4

How Adisors Ca Damage Trst 5

Fiess abot Fees 6

Trasparec i Fees 7

The Risks o Trasitioig to Trasparec 7

Ratioaliig the Fee Strctre 8

II. What Adisors Kow—ad Do’t Kow—Abot Their Cliets 0

Ke Research Fidigs 0

Respodet Details 4

III. Adisor Best Practices: Bildig Trst with the Fee Discssio 5

For Steps to Sccess Whe Discssig Fees 6

Coclsio 9



At oe time, acial adice sall came olded ito aother serice,

sometimes i the orm o sggestios rom a ta accotat, more

reetl i the orm o stock tips oered b a broker-dealer. Ote,

it was good adice. At times, howeer, it was coficted, becase

moig particlar prodcts sometimes took precedece oer doig

what was right or the cliet.

Oer the last 5 ears, that model has chaged. First, adaces i

techolog ad reglator reorms led to the rise o discot brokers,

makig it diclt or the old-ashioed stockbroker to sstai the

same ee strctre. Later, partl i respose to that assalt, the

acial serices idstr looked to deelop a more stable ad less

cclical reee stream. This t i eatl with cosmer cocers

abot coficts o iterest, ad has led to a ew paradigm i acial

adice—the moemet toward oerig cosltatie serices istead

o prodct pshes ad straightorward ee strctres rather tha

comple or opae oes.

I this report, State Street ad Kowledge@Wharto look at how

acial adisors are egotiatig the bodaries o this eolig

relatioship. Specicall, the report eamies how adisors ca:

. Stregthe relatioships b egederig trst;

2. Best commicate the ale the brig to their cliets

gie how cliets geerall perceie ale; ad

3. Sccessll discss ees with cliets.



3

I. A Matt f Tt

THREE LEvELS OF TRuSTTRuST In TECHnICAL COMPETEnCE & KnOW HOW

There are certain components to trust that every client,

consciously or even instinctively, looks or in a nancial

advisor. First, by and large, investors are looking or

someone whose level o competence inspires trust.

In other words, an investor generally seeks an advisor

who is experienced and knowledgeable, one who can

help the investor make, or single-handedly make on the

investor’s behal, dicult nancial and personal decisions.

According to experts at Wharton and a survey o advisors and clients, trust is the

oundation o the advisor–client relationship. Although that might sound elementary,

it is evidently overlooked by many advisors. In act, some advisors take serious risks

when it comes to cultivating and preserving it through their communication practices,empathic skills, and competence in discussing what can be awkward topics, like ees

or sensitive personal and amily issues.

Charlotte Beyer, CEO o the Institute or Private Investors (IPI) in New York, an educational

and networking group or ultra high net worth individual investors, concedes that, at one

time, wealth management was a business “shrouded in mystery—and very, very high

prot margins.” Since the model has changed, via a transition rom product to service,

many nancial advisors have had to master the art o a new sales tactic. Call it the “sales-

ree sale”, this approach is now an essential part o every successul advisor’s repertoire.

The distinction is noteworthy because there is much less o an emphasis on pitching stocks

and mutual unds, and more on personal counseling and education, say Wharton marketing

experts. As with selecting other service providers, such as a amily physician, the advisor

the client chooses is requently the one the client eels she can trust the most.

As with selectig

other serice

proiders, sch

as a amil

phsicia, the

adisor the

cliet chooses is

reetl the

oe the clieteels she ca

trst the most.

According to Rachel Croson, proessor o operations and

inormation management at Wharton, this type o trust is

encapsulated by the question, “Do I trust that you know

what you’re doing?”

This report ound that although most advisors believe

they understand the importance o trust to the success

o the advisor-client relationship quite well, they may





5

Grubman points out that because wealth brings

unexpected stresses to many individuals and amilies,

coping with money issues can be dicult. Many advisors

struggle with the skills needed to solve the interpersonal

issues associated with wealth management. Grubman’s

bottom line: clients are more comortable and more

likely to continue their relationship with advisors who are

able to integrate the nancial and the personal into their

nancial advising practices. Those advisors who don’t,

will likely ace limitations in the advisor-client relationship

and may nd that they are ultimately unable to satisy the

client. Without the personal dimension, or without the

client’s trust in the advisor to handle personal issues and

sensitive inormation with empathy and tact, the client

will not eel connected to the advisor. Consequently, the

advisor is oten unable to get to the heart o a client’s

nancial situation—the personal issues that underlie

one’s relationship with money.

According to Richard Marston, proessor o nance at

Wharton, increasingly the value o nancial advice is not

really managing the money, but in the “soter” advisory

elements—personal counseling and instruction. “The

advisor has to understand the logic behind the advice

and work the argument through with the client so the

client really understands it.”

Clients are looking or advisors whom they trust

enough—a trust grounded in the rapport established—

to make dicult decisions or them. Barbara Kahn, a

proessor o marketing at Wharton, conveys the need is

similar to what people are looking or in their doctors. In

several research projects on how consumers make high-stake decisions in health care, Kahn ound that while

consumers are good at identiying the most important

actors to consider, such as quality o lie, survival rates,

and cost, they tend to have a hard time putting those

actors together on one weighted scale or in a single

rule. That’s where a trusted advisor comes in: in one o

her surveys, only 15% o respondents said they would

be comortable making a trade-o on a dicult health

care choice or themselves, but 61% said they would

be comortable with their physician’s use o a similar

model.

Kahn notes that similar results were ound when

consumers were asked to make hypothetical nancial

investment decisions. Since the choices that need to be

made in nancial advice are similar to health care issues in

that they are oten unpleasant or dicult (such as saving

money versus spending it now, or taking on additional

risk versus accepting a lower return), her theory is that

people want to nd someone who can make those kinds

o choices or them. “Because they’re stressul and not

un to think about, they would rather ask a nancial agent

to make those decisions,” she says.

HOW ADvISORS CAn DAMAGE TRuST

Even once trust has been established between the client

and the advisor, other variables can serve to compromise

the relationship. As with any relationship, advisors must

understand that trust is not a xed quantity and is easily

diminished. Weak investment returns might seem like

the biggest way in which clients lose condence in their

advisor. However, Wharton’s Bradlow contends advisors

tend to underrate the importance o proessionalism

among every person on the team o sta supporting the

relationship.

In act, Bradlow suggests that oten times only 15-20% o

the client’s contact is with the nancial advisor; the other

80% o the contact is with the advisor’s assistant and

support sta. Those people are likely to have a very large

impact on the client’s opinion o the advisor’s brand.



6 / State Street Global Adisors | Kowledge@Wharto

Bradlow argues that proessional, well-trained support

sta are essential, especially with a relatively new client.

It can take between six months and a year or people to

orm a solid sense o an advisor’s persona and brand,

and that image can be shattered i multiple sources o

contact introduce a view that is somehow incongruous

or inconsistent with what the advisor has presented.

FuzzInESS ABOuT FEES

Fees are another critical area where trust can be easily

diminished. The challenges the industry aces with ees

are well-documented, but the results o the State Street /

Knowledge@Wharton survey suggest that the credibility

o many advisors may be hurt simply because o the way

they are discussing their compensation.

In act, the survey results (see Part II o this report) suggest

that many advisors nd ees a dicult subject to discuss.

And they’re not alone. Z. John Zhang, a proessor o

marketing at Wharton, agrees: “In all service industries,

nobody really wants to talk about the prices. You want

the customer to ocus on the service you provide and the

results that you can deliver. I think or nancial advisors

it’s the same.”

Ironically, although advisors may try to skirt the issue o

ees, leading nancial advisors interviewed or this report

say that most o their clients aren’t all that concerned

about the absolute levels o the ees. What they are

concerned about is clarity. This isn’t surprising: Financial

advisors and marketing experts at Wharton suggest that

or most people, the issue isn’t really whether ees are

high or low, but that they know what they are.

Yet, despite years o negative publicity and controversy,

some Wharton scholars are skeptical that consumers

are getting as much clarity as they desire rom the

nancial services industry. “The most important thing

is transparency—so people know what is going on

unequivocally—and I’m not sure that that’s happening,”

says Leonard Lodish, a proessor o marketing at Wharton

Fuzziness about ees seems to be endemic at every

stratum o the market. Even the ultra-high-net-worth

investors, who presumably are getting the most

sophisticated advice money can buy, are not satised

with the degree o transparency they are getting rom

their advisors, according to a recent Institute or Private

Investors (IPI) survey.

Charlotte Beyer, CEO o IPI, reveals that in the most

recent survey o members in her organization—who are

generally worth $50 million or more—a large majority

elt that while they believe the advice they receive

is objective, they are concerned that they are not

getting quite the ull story about the ees they pay o

the service provided.

In particular, she says, many members o her organization

explain that the way advisors present their ees oten

makes it very dicult or the investors in her group to

assess whether one rm is charging more than another

While the intent o such bundling is to keep clients rom

seeing the service as a commodity, Beyer argues that

the practice is ultimately corrosive to the relationship

“I I don’t eel that I completely understand the ee

structure and I’m not sure I can compare one rm against

the other...it puts a little chink in the trust I have.” And

once that trust begins to erode, she adds, the client

becomes increasingly vulnerable to being snagged by acompetitor.

When attempts are made to clariy ee structures, advisors

shouldn’t discount the potential or conusion or a lack o



7

1 Choi,JamesJ.,Laibson,DavidI.andMadrian,BrigitteC.,“WhyDoestheLawofOnePri ceFail?AnExperimentonIndexMutualFunds”(May2006).NBERWorkingPaperNo.W12261AvailableatSSRN:http://ssrn.com/abstract=905518

understanding o what the ees mean on the client side, either. In a recent study1, ormer Wharton proessor o business

and public policy Brigitte Madrian and two colleagues gave MBA and undergraduate business students prospectuses or

our index unds. One group received an additional “ee sheet” that compared the ees and their impacts on earnings

across the our unds, and another group received a “returns sheet” showing each und’s average annual returns since the

und was started. The participants were then asked to make hypothetical investments o $10,000, choosing among the

our index unds.

Since the unds were identical, the only dierence between them was the ees.

What Madrian and her colleagues discovered, however, was that the participants

“overwhelmingly ailed to minimize the index und ees” by neglecting to put all o their

money in the und with the lowest ee. The students who received the ee sheet did

better than the others, investing more money in the lower-ee unds. “What we draw

rom this is that disclosure matters,” Madrian says, “but how inormation is disclosed

also matters.”

Beyer predicts that this kind o uzziness over ees won’t be around orever. “I you think

about a lot o other things that you pay or—i you go to buy a car, you know what the blue

book says, you know what the sticker price is. Increasingly, nancial services are going to

become more and more transparent,” she says.

TRAnSPAREnCy In FEESTHE RISKS OF TRAnSITIOnInG TO TRAnSPAREnCy

This lack o transparency in ees has helped make many advisors much more vulnerable

than they realize, claims Mitch Anthony, a Minneapolis-based consultant to the nancial

advisory industry. “No matter how much you think you realize the level o distrust over

ees, we underestimate it. It’s easy or the industry to say we’re changing the way we do

business because we want to build trust with our clients, and then come out with a bunch

o touchy-eely ads, but all it does is increase the level o cynicism to the consumer.”

Already, some experts believe that the pressure or more transparent pricing is pulling

the market in two directions. “I think it’s increasingly barbell-shaped,” says Wharton’s

Marston.

The winners, say Marston and others, are increasingly either advisors who oer custom

service (typically on a percentage-o-assets basis) or cheaper, almost automated solutions,

utilizing some o the increasingly popular low-cost index und amilies and exchange

traded unds (ETFs). The losers in the market are those who haven’t adapted to a world

“I o thik

abot a lot o

other thigs that

o pa or—

i o go to

b a car, o

kow what the

ble book sas,

o kow what

the sticker price

is. Icreasigl,

acial serices

are goig to

become more

ad moretrasparet.”








II. Wat Adi Kw—ad D’t Kw—Abt Ti Cit

Although clients desire clearer communication rom their advisors, the ndings o a survey o nancial advisors and

separately, afuent individuals, conducted or this report ound that many advisors’ relationships are much shakier than

they believe.

The survey, conducted by State Street and Knowledge@Wharton to assess the strength o the client-advisor relationship

revealed a material gap between advisors’ perceptions about their client relationships and the clients’ perceptions o

those relationships. While people are notoriously likely to discount the importance o emotional actors such as congenia

personality in their choice o proessional relationships, this discrepancy may still be a cause or concern or advisors and

or the marketers o advisory services— particularly as clients surveyed rated advisors’ perormance about hal as highly

as advisors themselves believe their clients rate them. And that may place some advisors at risk.

Key ndings o the research ollow:

FEES ARE An AREA OF MISCOMMunICATIOn BETWEEn

ADvISORS AnD CLIEnTSFIgure 1

In both the ocus group and the survey, ees were revealed

to be an area where there is a wide gap between what

advisors say and what their clients hear.

The actual degree o communication advisors and clients

have about ees is unclear. Almost all advisors surveyed

(95%) indicated they discuss their ees with their clients;

yet, only 61% o customers say that their advisor initiates

ee discussions with them.

Why the gap in perception between advisors and clients

on the issue? Bradlow believes it’s wishul thinking on

the part o advisors who are uncomortable discussing

ees. “It’s almost like they want to believe that this is

something that’s understood. I you believe that it’s

already been covered, then you don’t have to do it.”

For a graphical depiction o the complete set o raw survey results (advisors and clients), visitwww.ssgaunds.com.

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 1: CoMMunICATIon ABouT Fees:

The FrequenCy oF Fee DIsCussIons (PresenT sTATe)

yeArly

44%

29%

When An

Issue ArIses

18%20%

ClIenT rAIses

The suBjeCT

16%

34%

quArTerly

15%10%

onCe every

2-5 yeArs

7% 7%



Ironically, although advisors presumably don’t discuss

ees out o ear o scaring away clients, the clients who

participated in a State Street ocus group agreed that

they would preer knowing. “I have more o a problem

with not knowing,” said one woman.

FIgures 2 & 3

Perhaps as a result o this lack o contact, only a minority

o advisors surveyed believe their clients understand their

ee structure airly well or completely. Clients conrmed

that they generally do not understand their advisor’s ee

structures all that well.

TRuST IS ESSEnTIALFIgure 4

Among advisors, more than two-thirds ranked trust-

worthiness as the most important attribute in the selection

o a nancial advisor. For clients, trust is also the key

element (69%).

Most advisors said they believed their clients elt that

they were receiving a air value or the ees they paid.

Most clients are, in act, relatively satised with the value

they receive or the ees they pay, but generally less so

than advisors think.

In addition, costs matter much more to clients than

advisors believe. A striking 41% o advisors believed thatcost was their clients’ least important concern. Although

still the lowest-ranked actor, reasonable cost was

believed to be an important aspect (rated as one o the

top two most important attributes) by 31% o clients.

KnOWLEDGE IS MORE IMPORTAnT THAn

ADvISORS THInK

FIgure 5

Another discrepancy between advisors and clients is the

dierent weight they place on knowledge. While only

26% o advisors ranked knowledge as a top attribute,

nearly hal o all clients gave it their highest rating.

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 2: unDersTAnDIng The Fee sTruCTure:

hoW Well Do They unDersTAnD?

CoMPleTely

12%

23%

soMeWhATunDersTAnD

31%29%

FAIrly Well

20%25%

jusTunDersTAnD

29%22%

noT AT All

3%6%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 3: reCeIvIng FAIr vAlue For servICes ProvIDeD

exTreMelysATIsFIeD

4%6%

sATIsFIeD

52%

36%

verysATIsFIeD

16%21%

soMeWhATsATIsFIeD

25%30%

noT AT All

3%7%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 4: The IMPorTAnCe oF TrusT:

MosT IMPorTAnT ChArACTerIsTICs oF A FInAnCIAl ADvIsor

TrusTWorThIness

69%74%

unDersTAnDs

FAMIly neeDsAnD goAls

24%20%

PerForMAnCe

4%

10%

CoMMunICATIon

PrACTICes

13%16%

loW CosT

For servICesProvIDeD

5%

12%




Some members o the ocus group also saw competence

as extremely important—and ignorance as nearly a deal-

breaker. In the ocus group, or instance, one woman

who was asked to sell some holdings beore she moved

her account to a new rm, said that she was unable to

get her new rm to tell her what the tax consequences

o the sale would be, not even an estimate. “I wasn’t

really able to get any clear answers,” she says.

CLIEnTS BELIEvE THEIR ADvISORS ARE OBjECTIvE—

TO A DEGREEFIgure 6

Most clients are not entirely satised with the advisor’s

degree o objectivity. Perhaps, this is an indication

that, or most clients, their level o trust in their advisor

is not absolute, especially as it pertains to the ees or

commissions the advisor collects.

BuT ADvISORS DOn’T HAvE MuCH TIME TO

quELL CLIEnTS’ DOuBTS

FIgures 7-10

One challenge or advisors in correcting some o these

preconceptions is that their clients don’t actually want to

communicate more with them than they already do. The

burden, then, is on the quality o the communication and

not necessarily the quantity.

While some advisors would preer meeting with theiclients a little more oten, clients don’t actually want more

contact. In general, a ew more would like to hear rom

their advisor on a monthly and quarterly basis.

100%

80%

60%

40%

20%

0%

CoMPleTelyAgree

sTronglyAgree

soMeWhATAgree

ClIenT

FIgure 6: Degree oF ADvIsor oBjeCTIvITy

soMeWhATDIsAgree

sTronglyDIsAgree

CoMPleTelyDIsAgree

19%

30% 31%

14%

3% 3%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 5: The IMPorTAnCe oF KnoWleDge:

The MosT IMPorTAnT ATTrIBuTes To servIng ClIenTs Well

KnoWleDgeABle

26%

47%

PersonAlFACTors

38%

14%

ProACTIve

14% 14%

sTABle

4% 6%

TrAnsPArenT

7% 13%

resPonsIve

25%

15%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 8: CoMMunICATIon MeDIuM CurrenTly eMPloyeD

TelePhone

43%38%

FACe-To-FACe

32%25%

eMAIl

25%30%

WeBsITe

0%

7%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 7: CurrenT FrequenCy oF CoMMunICATIon

yeArly

9%17%

quArTerly

45% 46%

MonThly

39%

24%

WeeKly

7%6%

AlMosTnever

0%7%






I the survey is refective o general attitudes, many clients

eel disconnected rom their advisors. Instead o ignoring

clients once they’ve signed on, Anthony believes advisors

should tell them that “part o my value proposition is that

I’m going to pay attention to you.”

The results o both the survey and the ocus group

suggest that advisors need to think about their clients

more on an ongoing basis. As one participant in the ocus

group said, “The act is, I work too hard to put my money

with someone who doesn’t care.”

Ultimately, or advisors, increasing the level o trans-

parency and clarity in communications will help build

trust and improve their ability to develop productive, long

lasting and satisying relationships with clients. The next

section o the report ocuses on a best practices method

or discussing ees that can help advisors to build trust

early on and throughout the relationship.

RESPOnDEnT DETAILS

eall diided—53% to 47%, respectiel. A maorit

said that their ees were egotiable. Thirt-eight percet

said that the were egotiable or all cliets, bt 44%

said that egotiabilit depeded o asset sie. Ol 8%

said that their ees were eer egotiable.

CusToMer resPonDenTs. Cliet respodets were

eall diided betwee people who sed priate

baks or priate wealth maagemet rms (33%);

acial plaers (28%); or broker-dealers (27%). More

respodets worked with large proiders (49%) tha

was represeted i the adisor’s sample.

Most respodets paid or acial plaig/wealth

maagemet o a percetage o assets basis (42%),

bt commissio ol was also poplar (23%). Fees are

bdled or most o them (62%). Few egotiated their

ees with their adisor (74% did ot).

More cosmers had portolios o less tha $500,000

(48%), bt more were oer $5 millio tha represeted

o the adisor side (6% reported portolios o oer

$5 millio). The remaider ell ito the $500-999K

(20%) ad $ millio to $5 millio (26%) categories.Most did’t pa perormace ees (7%) or did’t kow

whether the paid a perormace ee (22%).

FoCus grouP. A ocs grop o afet iestors

who had respoded to the sre was moderated b

a proessioal moderator. The discssio was held i

new york Cit i jl 2006.

A total o 866 idiidals completed the State Street/

Kowledge@Wharto olie sre, which was held

betwee je 4 ad je 29, 2006. Two idetical sre

tracks (i.e., lies o estioig) were preseted to each

grop, which iclded: () 500 Cosmers ad (2) 366

acial adisors. Fiacial adisors comprised a wide

rage o iestmet ad acial serice proessioals,

ad cliets represeted a eall wide rage o portolio

sies.

ADvIsor resPonDenTs. O the adisors, 42% o respo-

dets were proiders o acial or wealth maagemet

serices; 30% worked or a priate wealth maagemet

rm or a priate bak; 28% were acial plaers; ad

6% worked or a wirehose. Sies were also diided

almost eall betwee large (32%); small (25%); ad

botie (29%). The ol derrepreseted segmet

was adisors at mid-sied rms (4%).

Adisors represeted a srprisigl broad cross sectio o

the bsiess. Media accot sie or the oerwhelmig

maorit o respodets was $5 millio or less. Respodets

agai were diided almost eall betwee accots o

less tha $500,000 (33%); accots o $500,000-$999,000(30%); ad accots o $ to $5 millio ( 25%).

Amog the 360 proiders, 58% charged a percetage

o assets, 2% charged a ee pls commissio. Eight-

see percet said the did ot collect a perormace

ees.The remaider was diided almost eall betwee

fat ee (5%); commissio ol (6%); ad fat ee b

proect (0%). Bdled ees ad bdled were abot



5

III. Adi Bt Pactic: Bidi Tt wit t F Dici

Frank also tries to keep ee discussions very clear. “I like to

put them all out on the table including our own potential

conficts, and I like clients to be really pragmatic in their

search.” He also has them ask the competition some

key questions: What’s your retention rate? How many

clients do you actually serve or try to serve? What’s your

perormance?

Frank says he always tells prospective clients, “Either

we’re the best or the second best choice or you. The

other choice is themselves...They could go out and put

together an array o index unds and do it themselves,

and the cost would be less. “They generally appreciate

the candor,” he says.

The successul advisors interviewed or this study arm

that the clearer and more direct the advisor is about ees,

the better. “Talking about ees isn’t always the most

comortable thing, but i you say it as a matter o course

and that’s the ee, clients are usually pretty accepting,”

states Glenn Frank.

Among ultra-high-net-worth investors, this already seems

to be the case. “My experience with investors and

nancial proessionals is that, increasingly, a discussion

o the business model is beginning to be held at the

beginning o the courtship,” says, Beyer o IPI.

As or ees, it’s

clear that obod

wats to talkabot them; bt

eperts ad the

sre propose

that there is a

high price to be

paid or aoidig

the sbect.

Years o perceived conficts o interest have made some consumers suspicious that their

nancial advisors are truly there to help them. As the survey and the ocus group results

demonstrate, some clients are in act alienated rom their advisors. “I’ve gotten to the

point where I listen to their spiel, but not really, because I really just don’t believe it,” saidone participant in the ocus group.

As or ees, it’s clear that nobody wants to talk about them; but experts and the survey

propose that there is a high price to be paid or avoiding the subject. They say a lack o

transparency about ees negates trust on all levels. Bradlow says that the survey suggests

advisors may even talk themselves into thinking that they have discussed ees enough,

when in act they haven’t. Dr. James Grubman, psychologist and consultant to wealth

managers and high net worth amilies, concurs that many times advisors avoid ee

discussions due to their own anxiety about the outcome. So, what is the right way to talk

about ees with prospects and clients?




Candor has paid o or Frank in more direct ways as well.

Frank relays that once he even had a client ask to be given a

higher ee, ater he had rst inquired about a ee reduction.

“We can do a lower ee,” Frank told him, “but you’re probably

not going to be the rst call that I answer.” In response, his

new client changed his mind and said he’d pay more. “You

get what you pay or—and he wanted to get more, so he paid

more,” Frank recalls.

I possible, most successul advisors interviewed believe a

single, simple ee schedule is usually the best way to go.

Besides appealing to clients, that kind o simplicity pays

other dividends as well. Jeannie Gibson Sullivan o Back Bay

Financial Group in Boston, remembers that at one point, her

rm oered 13-15 dierent ee structures. Now they have

one, on a single sliding scale. “It’s a lot simpler and it’s a lot

easier to automate.”

To help ensure that the client is perectly clear about the

ees, Patrick Carrigan, a senior investment management

consultant at Smith Barney in Dallas, reveals that his team

has put together a chart that shows what his rm’s oerings

cost and what their competitors’ oerings cost. Clients

have really responded well to the chart, he adds. “It’s been

extremely well received. It’s one o the most powerul things

we’ve done—it deuses the ee question right o the bat.”

FOuR STEPS TO SuCCESS WHEnDISCuSSInG FEES

According to Dr. Grubman, there is a lesson to be learned

rom these advisors’ approaches and, specically, rom

Patrick Carrigan’s method. He rmly believes all advisors

have it within their power to replicate Carrigan’s success.

“It’s a matter o developing procedures that really work,”

says Grubman. Just as doctors can be taught how best

to deliver dicult news to a patient, he says, so too can

advisors be taught how to best talk about ees. “The

discussion about ees has at least our components to it. I

you don’t ollow these pieces, it can go badly. I you ollow

all the components, then it goes well,” says Grubman

He describes a recipe o sorts or the ee discussion,

identiying the active ingredients necessary or successu

conversations about ees that oster client trust.

. DOn’T PROCRASTInATE

One key ingredient is to simply disclose. Advisors would do

well to tell clients what their ees are in as straightorward

a manner as possible. “The reality is,” says Grubman

“many advisors are really nervous about this.” They ea

that they will be put in the position o having to deal with

a negative or contentious response rom the prospect

or client. He oten nds that advisors don’t tolerate thei

own anxiety all that well and this causes them to avoid

the ee discussion as long as they can.

“I I don’t tell you how many basis points I’m going to

charge,” says Grubman, “we can’t ght over it. I I do

tell you, you might want to ght, and I don’t know how

to handle that. So instead I’m going to avoid the whole

thing.“ The advisor’s discomort with assertiveness is a

huge issue in communication skills.

In pointing to Carrigan’s success, Grubman notes “Jus

simply the act that the rm didn’t avoid and dealt with it

openly is an active ingredient. They didn’t procrastinate

They didn’t avoid. They did it—they disclosed.”

2. DESCRIBE FEES WITH CLARITy

Setting up ees simply and describing them clearly is a

critical second ingredient, asserts Grubman. “Advisors

oten mess this up, because out o their own anxietyor their own issues about ees, they will obuscate

They think that they are being specic in showing all the

shades o gray with ees. In reality, clients do not wan

shades o gray. They want it pretty black and white.”



7

For many reasons, advisors oten get incredibly detailed when it comes to describing ees. Instead o clearly stating a

ee o 70 basis points, or example, they’ll talk about the ranges in ees they charge or various types o clients. They may

then urther cloud the ee discussion by talking about an array o special circumstances that may or may not drive urther

modications in ees. Though the advisor may be well-intentioned in doing so, Grubman says that oering an excessive

variety o contingencies actually erodes trust. What advisors perceive as detailed disclosure o shades o gray, explains

Grubman, “is experienced by clients as loopholes, udging and being untrustworthy.” Intricately detailed ee menus just

contribute to ambiguity and generate mistrust, warns Grubman, so communicate ees directly with clarity.

3. PROvIDE COnTExT—BEnCHMARK FEES

Providing clients with context by benchmarking your ees, says Grubman, is the third step to

success in the ee discussion. Patrick Carrigan is immediately able to convey trustworthiness

and credibility by giving his clients a chart that not only discloses what his ees are but what

his competitors’ oerings cost. “Because i I know that the range o oerings typically is

somewhere between 0.95% and 1.3%, and you quote me 1.25%,” says Grubman, “at least

I know we’re in the range.”

Advisors are acutely aware o industry ee schedules and what their competitors may be

charging. However, many wealthy individuals do not know whether a ee being charged

“is good, bad or indierent”, according to Grubman, and that is unsettling or them. Money

and the ees charged or money management are not a water-cooler topic o conversation

or most wealthy clients. For a host o reasons, people can be rather secretive, preerring

not to talk with riends or acquaintances about their wealth or what they pay or services.

Context is key, according to Grubman, particularly or those clients who are working with a

trusted advisor or the rst time.

Market research demonstrates that embedding inormation in context actually conveys more

than i you deliver data without context. Grubman points to the Energy Eciency Rating on

appliances as an example o how context adds value. The eciency rating conveys not just

what the estimated annual operating cost is o the appliance you’re thinking o purchasing,

but also a comparison scale o that appliance against other models and brands. It shows

you exactly where your appliance alls within the ull range o possible ratings, giving the

consumer a much better vantage point rom which to evaluate the product.

What adisors

perceie as

detailed

disclosre o

shades o

gra, eplais

Grbma,

“is eperieced

b cliets as

loopholes,

dgig

ad beig

trstworth.”




There are ultimately a huge number o ways advisors can

communicate ees to clients these days. The ideal manner,

contends Grubman, would be to very clearly present up-

ront what the typical industry rates are or the advisors

type o rm, or a client’s particular net worth, or or a

specic category o client, etc. As Grubman points out,

Patrick Carrigan doesn’t just tell clients what his rm’s ee

is—he presents his ee in context with the range o ees

industry-wide. “Yes, this is scary,” recognizes Grubman.

“You may have to justiy your ee to the client i it is on

the high side. But, ultimately this is better than hiding

behind a lot o gures and then having the client nd out

later anyway.”

“So when we talk about what my ee is compared to

others, I’ve told the client many things. I’ve said ‘Look,

I’m honest. Look, I’m consistent with industry rates.’

Plus, I’ve educated you,” states Grubman. By providing

the client with inormation in context, he says, the advisor

conveys trustworthiness and provides real value to the

prospect or client.

4. PuT IT In WRITInG—GIvE CLIEnTS SOMETHInG

TO REFER BACK TO

Finally, advisors would do well, Grubman adds, to put

their inormation about ees in writing, because generally

people don’t retain inormation all that well in a ace-to-ace

meeting. “We know people simply don’t remember hal o

what goes on”, he says. So, what an advisor says to a client

is almost never what the client walks away remembering

This phenomenon explains both the discrepancy in

perceptions about ees revealed by the survey, and

also where mistrust can sneak into the relationship. An

advisor may know he told a client the ee was 90 basis

points with one exception. The client remembers it as

90 basis points, no exceptions. Both parties, then, begin

to think that the other is being untruthul or trying to get

away with something should a disagreement arise.

Grubman points out that there are a lot o lessons to

be learned rom the medical eld and that a host o

similarities exist between the advisor-client and doctor

patient relationships. In the medical eld, or instance

a lot o procedural training takes place around how toprescribe medications. Doctors are being trained to ask

patients to repeat back instructions regarding when and

how to take their medications, or the reason that patients

simply do not retain inormation well.

Why Carrigan’s method works, asserts Grubman, is tha

he gave them a chart they could take home with them

“So i they orget or they’re not sure, they can reer back

to something and say, ‘Oh, yes, that’s right, they said it

[the ee] was 1.25%.’”

I advisors want people to retain important inormation in

detail, says Grubman, they must write it down: “Written

and visual lasts. Oral and verbal fies away.”



9

FOCuS On THE PROCESS, nOT THE FInAL COnvERSATIOn

Ultimately, where many advisors ail in building trust about ees, says Grubman, is by ocusing only on the end o thediscussion—or on the conrontation they ear will ensue once they tell the client what the ee is. “Everybody is ocused

on that last segment o the conversation,” says Grubman. “In actuality, i you haven’t done the component pieces the

correct way leading up to that point, how are you going to have that last [bit o the] conversation? It’s liable to go wrong

in a zillion ways.”

According to Grubman, competence in the ee discussion can be achieved easily when there

is a well-dened, repeatable roadmap or the conversation. By ollowing the aorementioned

steps, which are independent o who the client is, says Grubman, advisors build trust and

place themselves in a more capable place rom which to address client-dependent variables,

such as the client’s personality or situation in lie. That is the bottom line in the relationship:

responding well to a client’s concerns, states Grubman. Here is where the advisor must

be equipped with the communication skills so integral to the “relationship competence”

discussed earlier.

COnCLuSIOn

Ultimately, the nancial advisory business is changing and becoming more transparent.

Wharton experts, as well as those like Dr. Grubman and successul nancial advisors

themselves, say that this way o doing business is better or the client as well as the

advisor, in that it tends to build a stronger, longer-lasting relationship. But as the State

Street / Knowledge@Wharton survey suggests, doing business in this way may require

un-learning behaviors and attitudes, and acquiring new methods or communicating

eectively and openly with clients. “What is needed,” states Grubman, “is a paradigm

shit. And it’s happening.”

In a world where investment solutions and services are becoming increasingly commo-

ditized, experts agree that, or advisors, the extent to which they can act as trusted

counselors and educators to their clients will be the real dierentiator or measure o value.

And the surest way to build trust, according to Wharton aculty and other industry experts,

is by demonstrating through one’s actions and words competence in three critical areas:

knowledge, ethics and perhaps most importantly, interpersonal communications.

Accordig to

Grbma,

competece

i the ee

discssio ca

be achieed

easil whe

there is a

well-deed,

repeatable

roadmap or the

coersatio.



ttp://www.afd.cm

ttp://kwd.wat.p.d

This material is or your private inormation. It is subject to copyright o State Street Corporation with all rights reserved and

may not be reproduced without the prior express written permission o State Street Corporation. The views expressed are

the views o State Street Global Advisors as o the date the material and are subject to change based on market and other

conditions. The opinions expressed may dier rom those with dierent investment philosophies. The inormation we provide

does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy

or an oer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status

or investment horizon. We encourage you to consult your tax or nancial advisor. All material has been obtained rom sources

believed to be reliable but its accuracy is not guaranteed There is no representation nor warranty as to the current accuracy

For ther iormatio, please isit:

Special Report

Bidi t Tt Diid:The Financial Advisor-Client Relationship

Documents

Wharton Financial Advisor - Client Relationship