Morningstar study says advisory clients are stuck on investment performance

Citing Vanguard's research, Morningstar says advisers need to emphasize the value of behavioral coaching over portfolio management

Feb 26, 2019 @ 2:16 pm

By Jeff Benjamin

Most investors still measure their financial adviser based on the performance of their portfolio, and most financial advisers know that, even if they think it's a mistake.

A new study by Morningstar shows financial advisers have their work cut out for them when it comes to helping clients to understand the real value of professional financial advice.

The Morningstar report, which cites research from The Vanguard Group, underscores that many of the intangibles related to behavioral finance are the true foundation of advice and the biggest value investors get from their financial advisers.

According to Vanguard's more than two decades worth of research on "adviser alpha," just helping a client stick to a predetermined investment strategy adds at least 150 basis points' worth of portfolio performance.

Yet according to Morningstar's survey of nearly 700 individual investors, the idea that an adviser helps clients control their emotions ranked dead last on a list of 15 things clients value.

When Morningstar asked 161 financial advisers where they thought most clients ranked an adviser's value in controlling investor emotions, it came in at number 12 out of 15.

"Behavioral coaching is the single biggest value that modern financial planning can bring, and advisers understand that, but they are also aware that clients don't see the value," said Ray Sin, behavioral scientist at Morningstar.

Samantha Lamas, associate behavioral researcher at Morningstar, said that financial advisers generally recognize the value they bring as behavioral coaches, but that the disconnect in what clients see is a problem.

"We think the industry in general is on board with the idea of behavioral coaching, but investors seem stuck in investment performance," she said. "Advisers need to show clients their job is about more than just investment performance."

In some respects, it's not surprising that clients are measuring their advisers based on portfolio performance because most of the financial planning industry still pegs fees to the size of the investment portfolio.

But as behavioral coaching becomes a larger part of what planners provide, the Morningstar researchers say advisers can take the emphasis off investment performance by focusing on more concrete goals and objectives, including outcomes.

"We encourage people to think about the goals, because money is just a means to an end," Mr. Sin said. "You have concrete things you want to achieve, and the value of a behavioral coach is transforming money into things you want to do."

Don Bennyhoff, senior investment strategist at Vanguard, said he wasn't surprised by the low value that investors in the Morningstar survey placed on an adviser's ability to manage client emotions.

"You have to think about the fact that most of the people financial advisers are really looking for are wealthy, successful, Type A personalities, and it's going to be hard for them to admit that somebody needs to help them control their emotions," he said.

Mr. Bennyhoff, a former financial adviser who has been studying adviser alpha at Vanguard for 20 years, said it's up to financial advisers to emphasize relationship management as a fundamental value, particularly at the start of a new client relationship.

"We would agree that the behavioral coaching angle is difficult for investors to acknowledge," he said. "When we first started this research 20 years ago, advisers were leaning on their portfolio management skills, whereas relationship management should be the fundamental value. I see advisers now embracing the role of relationship manager by allocating time to the client rather than the portfolio."

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