How Advisors can Improve Client Returns
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There’s a growing body of behavioral finance research on what investors can do to improve the performance of their portfolios.
But how about advisors – what can they do to improve investor returns?
Recently I came across research that answers that question. To my knowledge, this is the first time that the impact of advisor behavior has been quantified.
The results of this research were striking – six advisor behaviors were associated with better client performance, and one in particular stood out.
The study took place from 2001 to 2004, based on 22 advisors with Ameriprise Financial, each with at least 30 baby boomer clients with portfolios of $100,000 to $500,000. In depth interviews were conducted with each advisor, exploring their thoughts, feelings and behavior in client interactions.
The focus was on advisor behavior, not their expertise or investment approach.
Over the four years studied, 12 of the advisors’ clients had first quartile returns, averaging total returns of 25% compared to 14% for the market as a whole. By contrast, the other 10 advisors had client returns in line with the index.
In the interviews, the 22 advisors in the study demonstrated 12 different competencies –of these, 11 related to behavior and one to the advisor thought process. Of these competencies, six were widely shared by all advisors; these were “threshold” competencies. The other six behaviors werew demonstrated only by the advisors whose clients outperformed; these were “distinguishing” competencies.
These six distinguishing competencies accounted for 70% of the variation in performance of client portfolios. And of these, three especially stood out.
The traits linked to client outperformance
Here’s where it gets interesting.
Below are the 12 traits that were identified in the research – remember six were threshold competencies common across all advisors, six were distinguishing competencies that only the advisors whose clients outperformed tended to share.
You can skip to the answers below to see which of these 12 competencies were the differentiators.
Or you could take a few minutes to go through the list and do two things:
- First beside each trait, indicate if you think it’s a threshold competency that all advisors shared or one of the things that set apart advisors whose clients outperformed.
- Once you’ve identified the differentiating competencies, go back and tick off the three that you think were the most important.