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A Key Practice Management Tool Is Setting Client Expectations

Fives steps a firm took to clarify to clients what it does and does not do.

Veena A. Kutler and Annette F. Simon, 06/01/2006

This monthly series of articles will describe the steps and occasional missteps we took in building our financial advisory business, Mosaic Wealth Management. This is the third in the series. The first discusses how we became partners, and the third described our transition from home office to business suite.

Mosaic is a fee-only comprehensive financial planning and investment management firm located in Bethesda, Md., a suburb of Washington, D.C. At this writing, we have about $50 million under advisement, 40 plus clients, two employees, an 1,100-squar-foot office suite in a Grade A building, and the two of us--Annette and Veena--the principals and equal owners of the firm.

One critical practice-management lesson every advisor learns over time--often the hard way--is the importance of setting appropriate client expectations.

When we opened the doors of Mosaic in 2000, we knew from day one that we wanted to offer a comprehensive service--one encompassing all aspects of financial planning and investment management. This was the kind of service we would seek if we were in the market for a financial advisor. 

Naturally, in the beginning our greatest challenge was bringing in new clients and growing the business. It would be an exaggeration to say that our target market was clients with a pulse, but our minimums were so low that it sometimes felt like that was the case. Over time, our minimums and our selectivity increased. We realized that our comprehensive financial planning and investment management service was not for everyone. We learned it was better to just say no to clients who were looking for services that did not fit our business model--even when we were tempted to say yes to grow our top line.

Over this same period of time, we learned, through our own experiences and those of respected industry leaders, that our service must be priced appropriately to be both a value proposition to our clients and profitable for us. Gradually, we raised our minimums and migrated from AUM and financial-planning fees to a comprehensive retainer fee.

How to Manage Clients' Expectations

Since our first days, business has grown steadily. We have increased our assets under management and, perhaps more significantly, strictly adhered to our higher standards for new clients. While most of our clients are generally delighted with the service we provide, from time to time we have heard offhand comments and questions that remind us how difficult and important setting client expectations can be.

Maybe you've heard some of these remarks yourself:

"When I hired a financial advisor, I assumed that my portfolio would never go down"

"Yesterday, we asked you to analyze the impact the vacation property we want to buy will have on our retirement plan. Why haven't you called yet with the answer?"

"You're raising my retainer fee for the year. Does this mean it will go up every year?"

"Can you buy me some shares in this company that is going to IPO next week?"

"Why has it taken so long to transfer my portfolio from Merrill Lynch?  I thought it would only be a few days"

"My broker used to come to my house for meetings. I assumed you would also."

The good news is that our clients seldom complain because of errors we have made--not because we don't make them, but because we always readily acknowledge and do our very best to remedy any mistakes we are aware of. Instead, our clients' occasional questioning is usually the result of a mismatch between our policies and services and a client's expectations. We believed our initial consultation meeting clearly spelled out our philosophy and day-to-day process. What we rather quickly discovered is that telling a client/prospective client something once is not enough. Important information must be repeated and presented in several different ways for clients to absorb it and to establish appropriate expectations within the advisor/client relationship.

Here are just some of the steps we have taken to clarify what it is we do and don't do.

Initial Telephone Screening

Meeting with a prospective client who does not fit our practice profile is a bad experience for everyone involved. It wastes our time as well as the client's.

To avoid this unpleasant situation, we now have a frank telephone conversation with each new prospect before scheduling an initial consultation meeting. In the clearest possible terms, we explain what our service is and is not. We ask them to complete and return a three-page form, so we can evaluate whether their financial situation fits our client profile. Their willingness (or lack thereof) to fill out and return a form is an excellent indicator of the prospective client's expected level of cooperation in the data gathering process.

Initial Client Consultation Presentation

Through the years, our presentation to prospective clients has been modified numerous times--always with an eye toward enhancing transparency about who we are. Our goal is a no-surprises relationship. We want clients signing on with Mosaic to know exactly what they will be getting. In our presentation, we emphasize the following points:

  •  Our value proposition: Comprehensive financial planning makes real differences--both qualitative and quantitative--in clients' lives. 
  • Not all prospective clients are a good fit for Mosaic and our service is not what every consumer will want.
  • We have a clearly defined investment strategy: We are diversified asset class managers--using mainly DFA funds and exchange-traded funds.  Diversified portfolios sometimes underperform standard market benchmarks and occasionally experience negative return periods--a fact that we emphasize to every prospective client. We also make clear our policy with regard to individual securities within portfolios.
  • After our discussion and formal presentation, we review our standard contract in detail including the section that explains the initial fee and annual fee reset policy.
  • We provide a complete list of documents and expense data we need to complete the financial planning process.

New Client Meeting

Our first meeting with a newly signed client occurs before we start any planning or analysis. In this meeting, we take a thorough money biography to better understand the behaviors and attitudes with regard to the client's financial life. This is also another opportunity to explain our process and remind our clients what they can and cannot expect from their relationship with Mosaic.

Although we have previously covered much of this information in the initial consultation meeting, we use this meeting to anticipate and answer questions about the mechanics of the engagement: How will the account transfer process work and how long should it take? What is the procedure for accessing money in my investment account? How often will we meet and communicate with Mosaic initially and in years to come?

Asset Allocation Meeting

After the initial financial planning process, we again meet with our clients before restructuring or investing their portfolios. In this session we once more lay out our investment philosophy and approach in conjunction with the unique strategy we are recommending to the client. Here we discuss both the benefits and the potential drawbacks of our strategy using more detailed historical data analysis than we have in prior meetings. At the conclusion of the presentation and discussion, we mutually agree upon an appropriate investment strategy and require the client to sign a detailed Investment Policy Statement.

Over the years, we have noticed that some clients forgot that we provide a comprehensive financial advisory service that incorporates both planning and investments. Instead, there was a tendency to focus purely on investment strategy.  We have a good investment strategy that has yielded excellent and consistent results. However, our service and value-add to clients goes well beyond that. We believe that our financial planning process adds to the bottom line by helping clients control spending, increase savings, and reduce taxes. We recently hired an executive coach and among other issues asked for her input on our client reporting package. In working with her it became clear to us that our investment-focused reports were contributing to the communication problem with clients. We spent a great deal of effort in redoing the reports we give our clients at meetings. The new report package we now use in meetings with clients is described below.PAGEBREAK

Recommendations and Periodic Reports

We present our initial as well as on-going recommendations to clients in a report packet that is designed to focus attention on all issues beginning with the biggest picture ones. It covers the reasons they decided to work with Mosaic, their goals and issues when they first began working with us, and the progress that we have made toward those goals. The report is five to six pages long and contains:

  • A one-page summary of Mosaic's mission, the on-going process we employ and our basic investment philosophy. We tell our clients that this is a reminder of our service in summary form and also provides the criteria they should use in evaluating the work they have done and will do with us.
  • A one- or two-page summary of the client's initial issues, the goals we have identified along with specific achievements they have accomplished as Mosaic clients, and the areas they need to focus on going forward. This section also illustrates the changes in net worth over the client's years of working with us.
  • A one-page summary of a cash-flow based Monte Carlo scenario analysis, and when appropriate a one-page summary of spending and/or other cash-flow-related data. We have found that this section generates good discussions. We explain that meeting objectives requires cash-flow on both a current and future basis. Cash flow can be generated from a variety of sources: earning more, saving more, spending less, paying less taxes, strong investment returns, inheritance, and lastly from winning the lottery. Of these factors, some are more under the client's control than others.
  • A one-page market analysis including both qualitative and quantitative analysis of the current market and trends.
  • A one-page summary of the composition and performance of the client's Mosaic-managed accounts.

Since we have implemented this new report format, we have found that clients are more able to see where their real issues are. They better understand our planning recommendations and realize that while portfolio performance is a big part of the future plan, it is not the only one.

A Work in Progress

While we think that the steps we have added to our process over the years have helped to clarify expectations, the evolution continues. Some new steps we are working on include adding an FAQ section to our Web site to address in a brief, summary format what we do and what we don't do and providing a sample fee reset letter in our initial client folder to further illuminate the fee reset process.

Ultimately, we know it is impossible to achieve perfect communication with clients (or anyone) for that matter. But life is more pleasant for advisor and client alike when the advisor takes the time and effort to clarify the process and set achievable expectations.

Next month, we'll air some dirty laundry, and discuss how we have worked through conflicts that have come up between the two of us--and how working through those conflicts has strengthened our partnership.

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