Top facts about financial advice evolution
As financial advice and the value offered by adviser-client relationships evolve, astute financial planners must keep abreast of the reasons why clients hire them. At first glance, the answer is that individuals seek you out to deal with specific challenges such as investing increased income, receiving an inheritance or retirement planning. “These [reasons] are not wrong, per se, but the foci are rather specific, suggesting a narrow ‘job to be done’ mentality,” said Ryan Murphy, Global Head of Behavioural Insights at Morningstar.
Single needs not a great measure of value
Murphy was commenting during his presentation to the ‘Minds and Machines 2024’ webinar, an event jointly hosted by the CFA Society South Africa, Global Association for Applied Business Sciences (GAABS) and Momentum Investments to explore the future of behavioural finance and financial advice. He opined that a ‘single need’ assessment of financial advising risked overlooking the many different sources of advice-related value. Referring the audience to a comprehensive meta-analysis conducted by Merrill Lynch, titled ‘The value of personal financial advice’, the speaker highlighted eight financial planning activities worth investigating further.
The activities were listed under three broad themes, including understanding your clients’ lives, understanding your clients’ financial strategies, and keeping your clients on track. The ‘lives’ component consists of client assessment, asset allocation, behavioural coaching and tax management. The ‘financial strategy’ tag spans goal-relative optimisation, product allocation and savings and withdrawal guidance. And the ‘staying on track’ tag deals with rebalancing. These functions will no doubt be familiar to the financial advisers and planners among FAnews’ readership, though you may describe or label them differently.
“The study shows lots of different sources of value, but one that jumps out is the value of behavioural coaching,” Murphy said, because it adds up to 200 basis points of value annually. Another fund manager, Vanguard, refers to the different sources of value added by good financial advice, which includes influencing client behaviour, as ‘advisor alpha’. Yet in Morningstar’s experience, when asking clients to rank a range of advice-related functions, activities such as ‘behavioural coaching’ or ‘helps me stay in control of my emotions’ feature rather poorly.
Behavioural coaching does not shine
According to the presenter, behaviour coaching is not the sort of thing that people are looking for, at least not explicitly, when they consider hiring a financial adviser. Exploring this matter further reveals a significant mismatch between what adds value in the adviser-client construct versus what clients go in search of. “Behavioural coaching is a tough sell, and paradoxically, [so too] are some of the soft skills that are the foundation for some of the best sources of value in advice”. The question becomes how to make advice-related value-adds more intuitively appealing to clients, which requires understanding clients’ motivations “in their own words”.
Morningstar’s latest research is based on 623 household responses to why they hired a financial adviser. But instead of going to the market with the usual checkbox-heavy or happy-sad-slider survey form, the asset manager allowed respondents to give written responses to open-ended questions, anonymously. “For this research, we wanted to try something different and allow people to articulate in their own words what they are looking for when choosing an adviser,” Murphy explained. It is worth noting that the aforementioned households were already working with financial advisers, paying for advice and actively investing.
The benefit of allowing free-form responses is that you gain greater insights into the motivation for decision-making, in this case, the reason why individuals decide to engage a financial planner. The challenge, of course, is in sifting through the thousands of words of survey responses and extracting the key themes from them. “It is not as though you can push this ‘pile of words’ into an Excel sheet and be able to find averages or some kind of structure,” lamented Murphy. “It takes more sophistication to tease out meaning”. Enter artificial intelligence (AI) and the combination of LLM (Large Language Models) and LDA (Latent Dirichlet Allocation).
AI, LLM and LDA make sense of unstructured data
What followed was further proof that emerging technologies are finding application across all aspects of the financial advising and investing paradigm. Used in combination, LLM and LDA allow for general themes or topic clusters to be extracted from large, unstructured data sets. For this study, the data was also cross-validated by several human experts. According to Murphy, “both human and AI ‘assessors’ converged on the same reported categorical structure”. The research uncovered seven emotional motivators (A-G) and five financial motivators (H-L), which we share in the following bulleted list.
- Client discomfort handling financial issues
- Quality of relationship with an adviser
- Quality of communication with an adviser
- Self-presentation of the adviser
- Recommended or encouraged by friends/family
- Behavioural coaching
- Other emotion-related reason
- Specific financial needs/goals
- Quality of financial advice and services
- Return performance-driven factors
- Other financial-related reason
- Former adviser retired/moved
Explicit versus implicit value-adds
Points A and H, with a combined 32%, emerged as the most common categories among open-ended responses to the request to ‘list some reasons why you hired your financial adviser’. Point F, behavioural coaching (15-17%); point E, recommended by friends or family (12%), and point B, quality of relationship with an adviser (10%), filled out the top five. According to the presenter, your clients “are looking for a sane voice to be an expert or to bounce ideas off of”. Even so, the phrase ‘behavioural coaching’ does not explicitly appear in the dataset.
A key observation from this process was that many of the 11 reasons for hiring a financial adviser were grounded in emotion. Another important point was that advisers and planners need to position or sell their value-add in terms that resonate with clients. “If there is a mismatch between how you talk about our value-add and how clients talk about it, there could be some misperceptions,” Murphy said. He singled out behavioural science as a means to bridge the gap between advisers and clients, and to figure out how to make the advice value proposition more intuitively appealing.
The presentation offered some suggestions as to how you might address the three key motivations. First and foremost, you need to acknowledge your client’s discomfort in handling financial issues. Under the behavioural coaching tagline, you need to motivate your clients to stick to their plan over time, and provide guidance as to what they should do and what not to do during certain financial situations. And finally, you can address specific financial needs through focused retirement, tax or wealth planning solutions. The three motivations, and how you address them, become a lens through which to dissect your value proposition.
An empirically-driven motivational lens
“Based on the empirically-driven motivational lens that we have described here – discomfort, behavioural coaching, and specific financial needs – you have to take apart your value proposition and redevelop it such that it more naturally resonates with what people are looking for,” Murphy said, suggesting that you feature the phrase ‘achieving your financial goals’ prominently in your advice offering. He concluded the talk by reminding the financial advisers and planners in the ‘room’ that advice value was evolving. His conclusion, in our words:
To facilitate engagement, and promote investor success, financial advisers and planners must learn how to explain the major parts of your value proposition in a way that is intuitively appealing. This reframing should accentuate your value proposition and drive more clients to your practice.
Writer’s thoughts:
This interesting presentation suggests it is easier to explain the impact of behavioural finance on portfolio returns, than it is to measure the value an adviser adds in influencing said behaviour. Have you had much success in integrating emotion- or behaviour-based value into your financial advice offering? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
