What Research Says About Likability, Client Compliance, and Your Value

Likability and confidence

The decision by an investor to retain a financial advisor is significantly influenced by emotional factors, along with rational considerations like financial performance and expertise. One of the primary emotional factors is likeability.

One study found that “homophily,” defined as our preference for others like us, was a primary factor in the likelihood of following financial advice. Homophily also plays a role in the decision to retain a financial advisor.

Another study found that advice expressed with confidence is more likely to be followed. Contrary to what was expected, the likability of the advisor didn’t significantly impact the likelihood of advice being taken.

Adding value

Since the value advisors add is such a spirited topic, I was intrigued to find relatively few studies measuring whether advisors improve the risk-adjusted returns of their client’s portfolios.

One study compared the returns of advised and self-directed Dutch individual investors. It found no evidence of differences in risk-adjusted performance between these groups. But it noted that the advised investors' portfolios were better diversified and carried significantly less idiosyncratic risk.

Another study reached a different result. It found financial advisors achieved, on average, “greater returns, lower risk, lower probabilities of losses and substantial losses and greater diversification....”

A third study found that obtaining financial advice is positively associated with desirable financial behaviors, especially for those with less financial knowledge.

Specifically, it found improvement in the following behaviors:

• Setting aside emergency funds: Participants demonstrated a greater likelihood of having emergency funds to cover expenses for three months in case of sickness, job loss, economic downturn, or other emergencies.

• Obtaining credit reports or checking credit scores: More participants obtained a copy of their credit report or checked their credit scores.

• Avoiding bank overdrafts: There was a decrease in the frequency of overdrawn checking accounts.

• Retirement planning: A higher number of participants or their partners/spouses established a retirement account through an employer or independently.

• Paying credit-card balances in total: There was an increase in the number of participants who always paid their credit card balances in full or did not use credit cards.

Final thoughts

There’s evidence that clients are more likely to trust and follow advisors whose recommendations align with their existing beliefs.

Emotional factors play a significant role in client decisions, influencing their choice to retain a financial advisor and, once retained, to follow the advice provided.

While studies vary in their findings regarding the direct impact of advisors on investment returns, they show that advisors contribute to improved financial behaviors and decision-making. These findings underscore the value of financial advice beyond just investment performance, emphasizing the broader impact advisors have on their clients' financial well-being.

Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.

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