How to avoid being the next Southwest Airlines

Here are three areas that wealth management firms should be monitoring to avoid taking the kind of reputational hit the airline just suffered.

Last week, the fabulous Southwest Airlines brand was dramatically tarnished in a matter of days.

As the cancelled flights accumulated, I began to ponder what events and factors, external or internal, could break trust and destroy the reputation of a well-respected wealth management firm?

I’ve been fortunate to help lead a growing registered investment advisor for three decades and have witnessed issues that can impact advisors’ reputations, both from personal experiences as well as observing my peers. Setting aside the obvious crimes of fraud and embezzlement, here are three key areas that I worry about as it relates to maintaining a solid brand.

First, there’s proactive client communication. Survey after survey tell us that the No. 1 reason people leave their financial advisor is a lack of communication. Clients don’t expect a call every month, but it’s important to reach out when there’s something that impacts a client, such as a change in a tax law, a large market decline or a challenge with a specific investment.

While proactive outreach is vital, perhaps even more important is the speed and efficiency in which you respond to clients. Are all calls returned by the end of the day? Are emails returned within 24 hours? When there’s an issue, is the client kept informed and provided with a timeline?

If you’re serious about being a great advisor, have a communication policy and strategy that you and your team adhere to, so your clients know you have their back.

Next, there’s the mistake of marrying clients to illiquid investments. Nothing will upset your client base more than a poorly performing investment that can’t be sold. Not only does the client lose money, but they can’t get their remaining dollars back.

Making matters worse, an illiquid investment can hang around for years, continually reminding the client of what a lousy recommendation you made.

Given the universe of traded securities, it’s baffling that so many advisors sell investments like nontraded REITs. One poorly performing fund can derail a client relationship. Ask yourself: Is the potential upside worth the risk?

Lastly, there’s contrarian investment performance. Clients can tolerate losing money when everyone else is losing money as well. The financial markets were awful in 2022, yet most clients stuck with their advisors because they realized it wasn’t the advisor’s fault.

However, clients won’t stick around for long if all their neighbors are all making money and they aren’t.

This is one of the great challenges facing those who try to outsmart the markets. Even if most of your choices “beat” the market, the times when you’re wrong will cost you dearly.

Obviously, there are other issues that can ruin your reputation, such as a massive trade error or a data leak.

If you want to avoid having to try and rebuild lost trust the way Southwest is going to have to, communicate, invest for the long term, and avoid illiquid or contrarian investment approaches. To put it simply, never leave your clients stranded when they need you most.

Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $15 billion in AUM.