High Net Worth Investing Client Satisfaction Trends

In 2007, families with over $500,000 in investable were asked the question “Would you give a positive recommendation of your advisor to others?” Only 31% of families answered yes. When the question became, “Are you satisfied with your advisor?”, then the affirmative yes only trickled up to 39% (the speculated reason for the eight point difference is that some families don’t want to share their advisor with others out of fear that the advisor would reveal personal details or additional clients would monopolize his time and diminish the quality of service.)

The obvious follow-up question is this: Why, before the financial crisis, did a near supermajority of clients feel uncomfortable with the type of financial representation that they were receiving? Was it unrealistic expectations? Grass is greener syndrome? Terrible advisor selection deserving of rebuke?

Nope. It’s all about a failure to meet expectations. Among people dissatisfied with their investment management, the three most common grievances were: (1) lack of communication, 38%; (2) higher fees than expected, 17%; and (3) greater investment losses than expected, 11%.

I told you before that if I managed large sums of money for specific clients, I would take them to Wal-Mart or something to see the specific execution of product sales to make stock selections feel tangible.

Considering any account I’d ever manage would be loaded with blocks and blocks of Coca-Cola stock, I’ll use that as an example. During 2007 through 2009, Coca-Cola fell from $32 to $20 per share. We are talking a paper loss of 37.5%.

If you don’t pay much attention to the specific construction of your assets–which would be a logical inference since we are talking about people that outsource the management of their assets to others–a paper loss of 37.5% can seem a pretty big deal. Few people want to build up a million dollars to see it turn to the $600,000 range.

I’d go to Wal-Mart, find the soda aisle, and point out the Coca-Cola, Fanta, Sprite, Diet Coke, Coke Zero, Chery Coke, Minute Maid, Georgia Coffee, Powerade, Del Valle, Dasani, Simply Orange Juice, VitaminWater, and Fuze Tea. I mention those brands specifically because those are the brands that are sold in the United States and generate more than $100 million in annual profits for shareholders of The Coca-Cola Company (KO).

It might be a goofy experience, but it would be worth it because I want to make the electronic statement blips come to real life as a tangible enterprise with 129,250 employees selling 508 beverages in 210 countries with a business model that ships $24.6 million to Atlanta, Georgia each day as the remaining profit after all expenses are deducted from sales figures. People are smart enough to get this stuff if you show a little faith in them and explain why an asset is extraordinary despite the stock price performance not indicating it. It also wouldn’t hurt to show a chart indicating 14.2% performance since October 20, 1956. Also, despite the 37.5% price decline, Coca-Cola was actually growing its profits from $1.29 to $1.47 while the price was falling.

But this pro-active behavior would be unusual. When the price of stocks start falling–precisely the time when families want guidance from their advisors–the managers take the ostrich approach and decline personal contact. It is as if they feel it is a personal failure that a stock they selected for the family account fell in price after the purchase date, and they hope they can wait it out for the price to recover before the family “really notices.”

No, that’s not sound management. When someone hires a financial manager, they want someone to explain the general investing landscape to them. It’s not just performance they’re after–even the basic of diligence could tell you to sock money into The Vanguard Wellington Fund if you are looking to build long-term wealth without sweating this minutiae. The hiring of an investment manager is as much a social contract as it is an investment selection one–the guidance aspect is a necessary prerequisite for getting a family to develop the gumption to stick with a strategy through the bad times.

They need someone to say, “We bought 1,500 shares of Coca-Cola on your behalf. The price is down a bit, but you should know that your shares represent $15,525 worth of liquid beverages sold around the world, is generating $3,075 in profits in your behalf, and will result in $1,980 being deposited to your accounts as a share of the profits. The company is doing wonderful, and eventually, the stock price will reflect this.”

The same story applies to fees. If you need to charge 1% of assets, then charge 1% of assets and be upfront about that in the beginning as a condition of explaining the relationship. Your clients are adults, and if you provide them the information to make an informed decision, they can either consent to hire you or not. But don’t charge 0.75% and then load up on revenue-sharing mutual funds that give you kickbacks to get to that 1% mark. If you must do that, be forthright from the beginning. And if you feel the need to be sly about your fees, you know you are doing something morally wrong. There’s no shame in being the most expensive man in town; the shame is in being the most expensive man in town while pretending you’re not.

Although I put most of the blameworthiness at the feet of financial advisors, I also put some blame on the clients. Among do-it-yourself retirement investors, do you know what the most important criterion drives investment selection? According to a 2011 Fidelity study, it is the five-year investment return metrics. That kind of tells you that people pay attention to the outputs without examining the underlying realities that drive those results. Because most people have the temperament in which 20% or 30% declines is a reason to bail, they have contributed to the culture of fear in which investment managers fear their clients during periods of losses. Managers should rise above this, but clients did contribute to this environment.

And secondly, using numbers from the same Northwestern study quoted above, only 3.5% of families with more than $500,000 in assets change management teams in a given year. If 61% of people are unsatisfied in a given year, and only 3.5% of them are willing to do something about it, then it tells me that clients are barking but not biting. If there is no meaningful threat of leaving, there is no reason to change this status quo of dissatisfaction.

In a way, this reminds me a lot of the problems in the legal field with client dissatisfaction. Do you know what the number one reason for legal malpractice claims is? Poor communication from the attorney to the client. The second involves the failure to meet deadlines such as the statute of limitations.

I think every financial house in the United States recognizes that relationships between financial managers and clients is important. Certainly, they indicate this in their advertisements. But when it comes to the execution, it’s clear that affluent American families feel their management house is not meeting the expectations set by the advertisements. I understand the difficulty–people who are proficient with numbers aren’t necessarily social butterflies, and people that can put you at ease aren’t necessarily the same people capable of understanding why Exxon is cheapest precisely at the moment when the P/E ratio is the highest.

The financial media community loves pointing out the rise of index funds in the past two decades, citing the outperformance of index funds compared to many client accounts run by an institution. But based on survey data, it may not be the underperformance that is driving people towards index funds. If client satisfaction remains this high, then it is only a matter of time until the number of people leaving their financial advisers starts to increase above that 3.5% clip.