One size doesn't fit all, or how advisors ought to adapt their strategies for their clients' behaviors

Brooke’s Note: Lisa Shidler and I were colleagues at InvestmentNews. It’s great having her contribute to RIABiz from her Chicago stomping grounds.

Financial advisors could learn a thing or two from the way Starbucks Corp. woos its customers, persuading them to stand in long lines to buy their cup of Joe, said an industry leader who spoke Monday at the Financial Behavior in Retirement Summit.

Starbucks has created loyal customers who are willing to wait, because once they reach the counter a customized drink like a tall caramel decaf non-fat latte will be in their hands in minutes.

In contrast, advisors’ clients don’t even understand their retirement plans, let alone the processes advisors use to create individual plans, said Tim Noonan, managing director of Capital Market Insights for Russell Investments, which is based, not surprisingly given the topic of Noonan’s speech, in Seattle.

Brands and processes

Financial advisors need to do a better job bolstering loyalty by creating strong brands and processes within their practices.

“What Starbucks does right is they are always trying to build a bridge of trust with the clients. They never assume it’s there,” Noonan said. “They work every day to develop trust with clients. Advisors need to do the same thing with clients.”

Noonan spoke Monday at the Third Annual Financial Behavior in Retirement Summit, sponsored by Financial Planning magazine, onwallstreet and Bank Investment Consultant. More than 200 advisors attended the conference at the Fairmont Hotel in Chicago. Last year, about 160 advisors attended this event, according to Bruce Morris, managing director of SourceMedia.

The search for a replacement to Marion Asnes as editor-in-chief of Financial Planning continues with no hire yet, he adds. See: Envestnet hires Marion Asnes to tackle its marketing challenge

The standard rate for advisors attending the conference was $695.

Today, the lineup of speakers is Katharine Coppola, territory manager for Jefferson National, Peng Chen, president of Ibbotson Associates, Brent Burns, president of Asset Dedication LLC, Stephen Huxley, chief investment strategist and founding partner of Asset Dedication LLC, Cathy Weatherford, president and chief executive of Insured Retirement Institute and Meir Statman, professor of finance at Santa Clara University.

Much of Monday’s sessions focused on ways advisors can secure more retirement assets by analyzing clients’ behavior more closely and using better processes with them.

Consistency counts

Noonan pointed out just 53% of Americans working with advisors have financial plans and of those just half actually understand the plan. That’s why advisors need to be consistent in explaining the financial planning process to clients.

For example, rather than giving clients a basic planning tool or a risk tolerance questionnaire, he said advisors should start out with specific goals and list the priorities of these goals for clients. They also need to do more extensive fact finding asking better questions to determine risk capacity versus tolerance for clients at the onset.

In addition, when advisors are crafting retirement plans for clients, they need to complete a Monte Carlo Simulation that includes the probability of success and magnitude of ruin to determine the client’s asset allocation, rather than just using a traditional mean variance optimization.

When they’re reviewing the client’s plan, they need to evaluate the funded ratio status and also use simple goal-based reporting rather than measuring performance against benchmarks.

“Every time, you interact with clients, it can’t be about wins and losses, it has to be about concrete things like sustainable spending policy,” Noonan said.

Using those types of specific steps should help make clients feel more confident even in an uncertain economy.

There’s no question that dealing with clients’ fluctuating behavior is a constant challenge, admitted Alfred J. Loomer, a senior financial advisor with Ameriprise Financial.

Jekyll and Hyde-bound

“It’s like Dr. Jekyll and Mr. Hyde. I have to remind them that they were ready to jump off the cliff a short while ago and I held them back,” he said. “I’ve struggled to develop the right words to say that financial ruin is in your future if your lifestyle doesn’t change.”

He reminds clients that the market is in fact cyclical and could change overnight again.

Another approach advisors like Mr. Loomer can take with their clients is to give them behavioral profiles, said Hugh Massie, president and founder of Atlanta-based Financial DNA Resources Inc. Massie said this process allows advisors to offer customized advice to clients by splitting them into four categories, lifestyle based, relationship based, information based and goal based. (For another story on an advisor who segregated her clients into groups, click here: What Meg Green was thinking when she purposefully shed $40 million of assets.)

This way an advisor isn’t doling out too much information to clients when really they’re more interested in goals.

When are you providing too much information?

“Not all clients want tons of information,” he said. “If you present all clients with a lot of information, you’re going to lose them early on and you need to modify the information you give for each clients.

He points out that advisors only truly learn 10% about their clients from a 2-hour meeting but can delve much deeper and be able to provide them with better solutions if they give them a profile test.

Advisor Ellen Dorle, a certified financial planner with Columbus-Ohio based Dorle Financial LLC, loads her clients with as much information as they’re willing to accept. She shows up to every client meeting carrying reports from Morningstar Inc. and numerous charts for clients.

But after hearing Mr. Massie’s comments, she acknowledges that perhaps not all of her clients want all of that information and she could save time if she were to have them take a profile test at the start of the relationship.

“It seems like they don’t all want as much information as I give them,” she said. “One of the things I say to clients is it’s their agenda and not mine. I want to give them what they really want.”