ORLANDO, Fla. -- With digital tools reshaping the industry, it may be difficult for some advisors to articulate their value to clients.
But a simple answer might be right under their noses: the importance of reporting performance to clients in a way that makes the most sense to them, according to Dynasty Partners Chief Investment Officer Scott Welch.
"We need to do better at articulating what our value proposition is," Welch says.
Welch, leading a session on goals-based approaches to portfolio building at IMCA's annual conference, notes that several tenets of behavioral finance are to blame for miscommunication between clients and their advisors. Left to their own devices--and sometimes with bad memories of the financial crisis--clients can harp on certain misconceptions and be hesitant to take on risk.
"The average investor today wants no downside risk," says Welch. Many, he jokes, have "a time horizon of one day."
But for advisors, Welch suggests the solution to the communication gap can be as simple as changing the structure of client performance reports. Once advisors have done the heavy lifting of establishing a good relationship with a client, "the performance report is probably the most tangible piece of information that you give your clients on a regular basis that proves you're worth the fee," Welch says.
But why? "With the advent of digitalization, [advisors need to] recognize we are being commoditized."
NOT NECESSARILY WHAT, BUT WHY
Presenting a client with recent performance numbers without context can result in unneeded confusion. Instead, Welch suggests presenting the information in a way that can help your client place the various aspects of their portfolio into buckets based on specific goals: What wealth do your clients aspire to? Then, use terms your client can comprehend, avoiding jargon.
"The only thing that matters from a client perspective is 'how am I doing?'" Welch says. "[Your client] doesn't care about benchmarks. She doesn't care about standard deviation."
While advisors may need more concrete examples to affirm to themselves they are doing a good job, clients just don't. At the end of the day, all a client wants to know is the progress of the plan, Welch says.
He suggests redefining alpha in a way that is both practical and easier for clients to understand and advisors to aspire to: "Anything I do with my clients' portfolio that my client sees value in and they're going to pay me for. That's alpha to me as a practitioner," says Welch. "If you accept that definition then things become interesting... it's not about what's in the portfolio, but why."
Welch emphasizes that one of the best ways to avoid losing a client as the industry shifts is providing an experience that makes them want to pay your fees.
It helps to think about why you might choose a luxury brand over the more affordable option. "We as consumers actively drive by the cheaper choice and choose to spend money at other places because we like the experience," Welch says.
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