Why investors fire advisors (and why they keep them)

Common wisdom states that investors fire their advisors because of unhappiness with their returns. But that’s not always the reason, two Morningstar behavioral experts said in a recent webinar.

“I have two issues with this assumption,” Danielle Labotka, Morningstar behavioral scientist, said of the idea that clients fire advisors because of insufficient returns. “The first is that I think it’s an unproductive narrative. And the second is that it’s not supported by research.”

The idea that returns are the basis for retaining an advisor “makes it seem as though advisors have control over the situation,” she said. “Markets are unpredictable but it’s not a question of if the market will go down but when and by how much. There will be times when clients lose money. No advisor can prevent that.

“But if we assume that clients sour on their advisor because of inevitable losses in the market, we’re conceding that advisors don’t have control over some clients leaving. I don’t think that’s true.”

Morningstar conducted research to find out why investors fire their advisors and what financial professionals must to do captivate and retain clients. Labotka said dissatisfaction with returns was not the main reason clients fired their advisors.

Research found that investors’ motivations for firing their advisors fall into two categories: emotional and financial. The top 5 reasons investors fire their financial professionals are:

1. Financial advice and services (financial motivation): Clients reported “I felt I was putting myself at more risk than I was comfortable with” and “The advisor was not providing us with the level of direction we were looking for, so we found someone who did.”
2. Relationship with advisor (emotional motivation): Clients reported “I didn’t feel that the advisor was putting my best interest ahead of his own” and “He did not care about us; he only wanted our money.”
3. Cost of services (financial motivation): Clients reported “He was pressing one button and charging me for it when I could do it just as easily” and “They were not giving us much advice and still charging us a lot of fees.”
4. Returns (financial motivation): Clients reported “The types of offerings were below to average mutual funds, which didn’t maximize my returns.”
5. Comfort handling finances (emotional motivation): Clients reported “Got a plan and implemented some of it but preferred mostly to self-direct.”

“These issues really point to advisors needing to understand clients’ expectations so they can meet them or help them have more reasonable expectations,” Labotka said. “The best way to do this is to develop a strong interpersonal relationship with your clients so you can get to know them, what they’re expecting and what they want from you.”

Two sides of the same coin

The reasons why investors fire their financial professionals and why advisors retain clients are “two sides of the same coin,” said Samantha Lamas, Morningstar senior behavioral researcher.

“The reality is not that the advisor made one mistake, and the client gave them the ax,” she said. “It’s more like they got off on the wrong foot and then, from that shaky relationship, there were these tiny little grievances that added up to the client finally firing their financial advisor.”

Morningstar asked clients why they hired their advisors. The Top 5 answers were:

1. Comfort handling finances: Clients reported “I don’t like making financial decisions” and “I feel more secure having a different view of my finances.”
2. Specific financial needs: Clients reported “We needed some outside guidance to plan for retirement” and “I wanted to start investing.”
3. Behavioral coaching: Clients reported “I lack discipline to stay invested when the market is erratic.”
4. Recommended: Clients reported “They have good reviews from close family and friends.”
5. Relationship with advisor: Clients reported “I found an advisor who understands me and I found to be a good fit.”

Comfort handling finances was the top answer when investors were asked why they continue to have their advisor.

The advisor/client lifecycle

Financial professionals must work with clients through the three stages of what Lamas called “the advisor/client lifecycle,” which are: growing your practice by captivating investors, nourishing your existing relationships to retain clients, and reviving struggling relationships where needed.

“When we see why clients are keeping their advisor, we find that clients are drawing on their emotional and financial desires,” she said. “We see that emotional support is something clients really do like. It’s something they hire people for, it’s something that keeps them coming back. They appreciate having an advisor who serves as a sounding board and gives them peace of mind. But they also appreciate the quality of the advice they get from their advisor.”

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