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  • Writer's pictureAkshay Nayak

Difference Makers For Advisory Clients

In the case of any advisor with a reasonable client base, a central challenge for the advisor would be to help their clients taste success with their money. And this is true regardless of each client's definition of financial success. And though most advisors would work to a clear set of principles when advising clients, not all clients would be able to extract full value from their advisor and therefore see their money perform to its full potential. But that doesn't change the fact that there are clients who, over time achieve above average results that make a lasting difference to their financial well being. This difference is born out of a set of personality traits that are common across clients who derive optimal value from their advisors and advisory engagements. And the central theme of this post would be to throw light on those winning personality traits that ultimately prove to be difference makers for clients when working with their advisors.

As clients, having clarity on our expectations from an advisory engagement is essential to being able to derive a superior advisory experience. Clients who get the best out of an engagement not only define and articulate their major financial goals to their advisors effectively, but also give advisors a clear mandate on the approach which they wish to see their advisors adhere to when advising them on the way they manage their money. Moreover, such clients would also be fully aware of the areas and aspects of their money management where they need to improve. For instance, some could be having trouble saving money consistently every month. For others, it could be controlling their emotions when it comes to their investments. There are even those who may not be satisfied with the way in which their money management systems are structured. And because these clients are aware of the areas where improvement is needed, they can clearly communicate the same to their advisors. This benefits clients because their advisors would clearly know what is expected of them right from the beginning of the engagement. This facilitates better alignment between the philosophies of the client and advisor. Also, clients can evaluate the performance of their advisors better by validating how well their advisors are adhering to the approach mandated to them at the beginning of the engagement.

The way we set return expectations from our investments goes a long way towards defining our chances of tasting success within an advisory engagement. Clients who stand out from the rest of the pack always set return expectations that are reasonable and realistic. They also dedicate time towards understanding the way in which various asset classes that they invest in work. They understand the fact that returns generated by an asset class may not be fully captured by their portfolios, owing to their adherence to an asset allocation strategy. And therefore, investment returns for a given period have to be assessed at the portfolio level, rather than at the asset class level. This can be understood better with an example. Let us say that equity has returned 10% while debt has returned 7% over a certain period, net of inflation and taxes. Now, someone who has a portfolio built with a 60% allocation to equity and 40% allocation to debt cannot expect a portfolio return of 17% (10% + 7%) for the concerned period. This is because only 60% of the portfolio would be able to capture the returns generated by equity and 40% of the portfolio would be able to capture the returns generated by debt. Therefore the actual return generated by the portfolio would be (60% * 10%) + (40% * 7%) = 8.8%. Such an understanding allows clients to maintain behavioural and emotional discipline all through their investment journeys. It also helps judge how rational and reasonable the advice imparted to them is. This would increase the probability of clients following the advice given to them wholeheartedly.

Another reason why some clients achieve superior results is because they don't compare their returns either with others around them or broader market indices. They understand that the one thing that is most relevant to them is being able to achieve their major financial goals. And as long as their investment returns and financial plans enable them to do that, they would be satisfied. For instance, let us say that a client sets a return expectation of 10% in light of their financial goals. If their portfolios generate 12% but the Sensex generates 15%, they would still be satisfied with the returns they have generated rather than complaining to their advisors about having underperformed the Sensex. Such a realistic approach to performance evaluation would mean that clients retain clear focus on what really matters to them rather than wasting their time and energy on a constant attempt to boost returns, which would ultimately be completely irrelevant to them.

The amount of trust clients place in their advisors also plays a major role in dictating the kind of success clients enjoy within an advisory engagement. Clients who enjoy significant success have realistic expectations from their advisors. They understand that the greatest value add in working with professional advisors does not arise from the incremental returns that advisors generate for them. It arises from the degree of discipline and structure that advisors bring into the way in which clients invest and manage their money. They also invest time and patience into strengthening their relationships with their advisors. They understand that investing and financial planning are processes that involve a significant degree of uncertainty and produce results over long periods of time. They therefore do not get complacent and move away from strategies that worked well for them when their investments enjoy a sustained period of consistent performance.

They refrain from terminating long standing relationships with their advisors on the back of short spells lasting say a few months or couple of years where results may not be satisfactory. They view terminating an advisory engagement as the last resort and exercise the right of termination only in case of blatant incompetence, negligence or moral turpitude on part of their advisors. This allows clients to build trust in their advisors over time. It also gives advisors enough time to imbibe their philosophies on investing and planning finances into their clients. And this automatically increases clients' chances of success on the path to achieving their financial goals.

This just goes to show that advisors have relatively little to do with the kind of success that clients enjoy in an advisory engagement. Client temperament, behaviour and discipline are significantly more crucial to client success in any advisory engagement. The positive here is that these are traits that can be developed in the right way by anyone and everyone with consistent effort over time. That being said, it is necessary for every client to put in the effort to develop these traits. Those who don't do so run the risk of losing focus on aspects that are most relevant to their circumstances and focusing on aspects that are superficial and deliver very little value for them in the final reckoning. And that would leave them in a weaker position, meaning that they end up with very little satisfaction regardless of the quality of the advisor they are working with. This would essentially mean that they don't extract full value from their advisors, thereby defeating the purpose of working with professional advisors and bearing the monetary costs involved The essential takeaway from here is that while most of the responsibility for delivering success is usually pinned on the advisor, it is actually the client who has a crucial role to play in defining the level of success that they would enjoy in their engagement with their advisors. Therefore, clients must wake up to the fact that they have just as much of a role to play as their advisors in ensuring a fulfilling advisory experience, not just for them but also for their advisors.

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