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What Are the Most Important Areas of a Financial Plan?

Clients rank investment results, fee transparency, access to quality investments, and more.

Michael M. Pompian, 09/15/2011

This article will review answers to behavioral questions asked to investors who use financial advisors in a survey I created last year. The survey was completed by 980 individual investors who subscribe to either Morningstar.com and/or Morningstar investor newsletter publications. The questions cover behavioral aspects of how clients view nonfinancial elements of their relationships with their advisors. Last month we reviewed answers to the following question:

How confident are you that the plan developed by your financial advisor will help you achieve your financial goals?

To see that article click here.

This month, we will review the survey question: What are the five most important areas of a financial plan to you?

As you may recall from recent articles, the purpose of the survey was to gauge investing behavior and choices, and how influential these choices are in the investment decision-making process. Of the 980 surveys that were returned, 306 were completed by investors who use financial advisors. The information contained in the answers given by investors who use financial advisors can be highly relevant to advisors in their quest to serve clients in the best way possible.

It is important to remember that the Morningstar investor survey is composed of a very specific type of investor population. The population of survey takers in the Morningstar universe was generally defined as "mostly male, mostly experienced [experienced having a double meaning here--experienced in the sense that they are not new to investing and experienced in the sense that that over half of the survey takers were over 60 years old], and mostly do-it-yourself" investors. What this means is that the majority of survey takers were proactive, engaged and self-directed investors, which, naturally, is only a subset of all investors.

The populations of survey takers that use financial advisors are likely to be somewhat less self-directed, but we can assume that because they subscribe to Morningstar services, they are still somewhat self-directed. It is important to remember not to extrapolate what is learned in this set of articles to the general population of investors because it contains many passive and/or unsophisticated investors as well as "middle of the road" investors who are somewhat engaged but don't have the time or aptitude for more. And of course, the general population of investors contains a higher percentage of women and young investors. For simplicity, I call the investors who took the survey that use financial advisors "PEM-FA investors" going forward to stand for Proactive, Experienced and Male investors who use financial advisors. 

We will now review the answers to a question about the most important aspects of a financial plan. The choices were: Investment Results, Transparency of Fees, Quality of the Advisor, Quality of the Systems/Reporting, Access to Quality Investments, Stability and Quality of the Firm, No Conflicts of Interest, and Research Capabilities of the Firm.

There are some interesting conclusions that can be drawn from the responses to these questions. I will offer my own observations and recommendations as they  relate to creating important aspects of a financial plan. Examining questions such as this is important because advisors should know how clients view nonfinancial aspects of their relationship with their advisors.

Investment Results
Clearly investment results are very important to clients. If you can't deliver at least close to benchmark relative returns, you are likely to have problems keeping clients happy. 

What is very important for advisors to understand is that oftentimes clients don't or can't relate investment results with how their portfolio is constructed (i.e., according to their risk tolerance). Naturally everyone wants no or low risk and high returns. But this isn't what the capital markets give us. So it is very important to communicate how the portfolio is constructed and what returns to expect. This will make for more realistic and satisfying client relationships.

Transparency of Fees
This was not a highly rated question among respondents, which is somewhat surprising to me. Clients should be concerned about fees as they have a big impact on investment results, especially in a low-return environment. As an advisor, you should strive to be as transparent as possible with fees. Clients are wise; they understand the value they are receiving from their advisors and don't mind paying a fair price for good advice and service.

Quality of the Advisor
Quality of the advisor is a highly ranked aspect of the client relationship in this survey. What this means is that not only do clients desire a highly ranked firm but also want a high-quality person to serve them. Advisors need to rely on themselves as well as their firms to serve clients. They need to use their skills of perception--understanding what the client is trying to accomplish and help them get there.

Quality of the Systems/Reporting
Although this is not a highly ranked item, it is important nonetheless. Clients have a difficult time comprehending all that goes into high-quality reporting and the systems that deliver it. Advisors need to understand that reporting is important to clients. In my experience, good performance reporting is essential to a good client experience. Without accurate, easy-to-read reports, clients get frustrated. Advisors should try their best to provide good reports and have up-to-date technology.

Access to Quality Investments
As an extension of delivering good investment performance, advisors need to offer high-quality investment products and services to satisfy clients. This is a highly ranked item and needs to be kept in mind when creating investment programs. "Open Architecture" is a buzzword that has been out there for a while. What this means is that advisors can offer their clients "best of breed" nonproprietary investment products and services. If advisors can deliver on the promise of open architecture, they will likely satisfy their clients on this important issue.

Stability and Quality of the Firm
On a relative basis, this was ranked lower than other factors. That could be interpreted to mean that clients value advice they get regardless of the stability and quality of the firm. However, I believe that clients want to do business with stable, high-quality firms and recognize that they are more likely to get the best advice from these types of establishments.

No Conflicts of Interest
Once again, on a relative basis, this was ranked lower than other factors. But I believe clients want to do business with firms that have low or no conflicts of interest. In my experience, as wealth level increases, conflicts of interest become more important. Advisors need to keep this in mind, especially when working with more affluent clients.

Research Capabilities of the Firm
On a relative basis, this was also ranked lower than other factors. Similarly to the previous two items, I believe that clients want high-quality research because this often leads to strong investment results, which in turn leads to a good client experience. What advisors should understand is that many resources, both inside and outside of their own firm, can add tremendous value to client relationships.

Hopefully you have learned something about how PEM-FA view nonfinancial aspects of their relationship with their advisors. In next month's article, we will be reviewing a new survey that is sure to bring more interesting and valuable information.

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