Trust is an essential asset for advisors to have with their clients—some would argue it tops the list.
Given current market conditions, some advisors may worry that the portfolio swings that clients are experiencing can erode trust in their relationship. Based on our research, however, advisor-client trust is driven by more than just returns or short-term portfolio performance. Yes, trust is a delicate thing, but if it’s built on a strong foundation, then it shouldn’t be shaken by the unavoidable ups and downs of markets.
Where Trust Comes From
In previous research, we looked at the drivers of trust in the advisor-client relationship by examining 18 different advisor behaviors, ranging from whether or not they have “similar values as their clients” to whether they “take the time to explain their decisions” to clients. Each of these behaviors falls under six factors commonly referred to in trust-related academic literature:
- Shared values
After running a survey with 588 individuals, we found that the three most impactful behaviors when developing trust in the advisor-client relationship were:
- “When my advisor acts in my best interest”
- “When I see that my advisor is knowledgeable”
- “When I believe that my advisor understands my financials goals”
It’s important to note that an advisor acting in a client’s best interest ranked far above the other behaviors in terms of importance. In other words, trust is largely driven by following the best-interest standard, not returns. In fact, the role of returns in many aspects of the advisor-client relationship may be overestimated. For example, a research paper in 2019 looked at the decisions to hire or fire a financial advisor during the Great Recession and found that a decline in wealth did not have an impact on firing decisions. Although firing decisions aren’t the same as maintaining trust, no doubt they are related.
Set Expectations for the Relationship Early and Often
Although it’s easy to blame a strain in a relationship with a client on market volatility and lost portfolio value, research suggests that lost returns may not be the blame. Instead, the strain may be the result of uncalibrated expectations. In other words, if a client’s trust in their advisor is dependent on returns, then the advisor may have inadvertently sold that client a false narrative.
Every financial professional knows that market volatility is inevitable, and every portfolio will have its ups and downs. But not all advisors may effectively communicate that to clients. Instead, some clients may misunderstand market volatility and how it impacts their investments. Volatility is inevitable, and even well-constructed portfolios go through large swings, even though they still may be on track to meet the long-term financial goals of the client.
To prevent this instance of miscommunication, advisors can consider incorporating the following talking points at the beginning and throughout their relationship with a client:
- It’s not if market volatility will occur, it’s when. Market ups and downs are unavoidable, all investors can do is make sure their portfolio is diversified, robust, and tailored to their long-term goals.
- Have a conversation with your clients regarding your commitment to the best interest standard and what that means for your relationship with them and their money. For example, explain that as part of that standard, you are monitoring their portfolios and will advise them if any changes are necessary that serve their interests alone.
- Consistently remind clients that the metric for success is achieving their long-term financial goals, not a return percentage nor beating a particular benchmark. Clients may need more reminders during times of volatility, but as research shows, people can be made less sensitive to losses by paying attention to long-term performance as well as their goals.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.