Manage Your Clients' Expectations

Managing client expectations is one of the most difficult, and often frustrating, aspects of the financial planning business. Although many clients can be quite reasonable when they lose money in their investments, there will invariably be a few who are determined to vent their frustrations at you via telephone, in writing, or in person.

But there are a number of things that advisors can do to help prevent most of these outbursts. That's by helping clients create expectations within the bounds of reality. It sounds almost too simple, but when clients are better educated about what they can expect from their investments (and their relationship with their financial planners), they are less likely to be outraged by things that are beyond the planner's control. This article will help you understand how to manage your clients' expectations and make the most of your relationship with them.

Key Takeaways

  • The financial advisor and client relationship can be a difficult one because of what's at stake—money and the potential for loss.
  • Many clients understand the risks and manage losses well while others can take their frustrations out on their financial advisor.
  • Financial advisors have to manage their clients' expectations to create a trusted relationship.
  • Advisors must make their clients understand what is and isn't in their control.
  • Managing these expectations comes with education, keeping perspective, communicating reasons behind poor portfolio performance, managing other expectations, and letting a client go if need be.

Education: The First Line of Defense

As a financial planner or advisor, the first step before any type of investment is made is to educate the client. This is especially true when the client has little exposure to investing.

Some clients may seek your services after they've heard of friends or family members reaping huge profits from a certain stock or other investment. Unfortunately, this type of client may not be aware of the risks involved, or the odds that are against them, in order to realize the same kind of gain.

It is thus imperative (and, of course, also your legal and fiduciary duty) to provide clients with a realistic perspective based on historical market performance right from the start. Being able to judge the amount of risk that a given client can emotionally take is also important when explaining the various levels of risk associated with different types of investments. A psychological financial profile will be helpful in providing at least a rudimentary idea of your client's risk tolerance.

Keep Perspective

One of the hardest things to explain to clients is that investment performance is almost always relative, especially if/when their expectations are not met.

When clients are unhappy with the returns they get from their portfolios, they may need to be reminded of how their portfolios are performing compared to the overall markets. If a client's assets grow 5% in a year, the client may not feel like they are getting much growth. But you may strike a chord with them if you point out that the benchmark indexes dropped by 5% that same year.

As long as a client's holdings do as well or better than the markets, you will have a solid defense against their complaints. That is, unless, of course, you promised them a minimum rate of return regardless of what the markets are doing.

Dealing With Poor Portfolio Performance

Unlike the situation where a client's portfolio is performing relatively well, if the client's rate of return is trailing the markets, you will need to be able to provide a good explanation.

Match the client's investment performance with the goals that they gave at the beginning of your relationship. If the portfolio is growing at a sufficient rate to achieve those goals, then external market performance is, for all practical purposes, irrelevant.

You aren't alone in all of this. Countless advisors have gone through these exact same situations. In the late '90s, there were some advisors who did not jump on the dotcom bandwagon. As a result, these planners had to continually explain to clients that they were invested more conservatively than the markets, according to their respective risk tolerances.

Once that bubble burst in early 2000, those same clients would have felt relieved that their managers did not invest in those "sure thing" securities. You might not experience such a validating event like the tech bubble burst, but if you have your clients' best interest at heart, you should have little trouble putting their situations in perspective and their minds at ease.

Managing Other Expectations

While investment performance is the chief area where client expectations must be managed, there are other areas of service where clients can demand too much. For example, clients who feel uneasy about their investment performance may call you several times a day to see whether their holdings are up or down. They may also get upset if you don't answer their calls personally or call them back immediately.

It's important to set appropriate boundaries with your clients regarding the type and level of services that you will provide them, and then stick to them. No matter how you are compensated, the fees that you charge your clients are a measure of your value. Despite this, many clients either expect something for nothing, or are not aware of the benefits you provide through research, profiling, and portfolio design. This issue will almost inevitably arise with those who shop for an advisor based on price alone.

For the persistent caller, a good way to send the point across is to let them know that your time is valuable and that you want to be able to give the same level of service to all of your clients. Most clients who are worth keeping will respect this. Other clients may expect a plethora of free services from you if they invest as well, such as a free comprehensive financial plan or income tax preparation. If you charge separate fees for those services, you must require the client to pay for those services as well. If you don't, then you open the gate for all of your other clients to demand similar treatment.

Financial planners provide a variety of services, including estate planning, retirement planning, risk management, tax planning, education saving, and more.

Letting Go

No matter how many services you provide, there will always be some clients who will become more trouble than they are worth. Clients who continually try to monopolize your time or resources need to prove that they can and will do adequate business to justify your efforts.

For example, you might be more lenient toward constant calls from a client whose portfolio is worth $2 million than a client whose portfolio is worth $10,000. If the client refuses to understand your boundaries, then you need to jettison your relationship with that person. This type of client may be better suited to a discount broker or other service that has a call center.

The Bottom Line

While there will always be clients who cannot be pleased, a great deal of conflict and dissatisfaction can be avoided by properly educating your clients and setting realistic goals. Furthermore, if you only promise them what you can deliver, they will not have cause to doubt you later on. Proactively meeting with your clients at regularly scheduled intervals will allow you to accomplish this.
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