The common faux pas financial advisers need to avoid

Financial advisers often make unintentional mistakes that can damage client relationships and trust, according to recent research by Morningstar.

“At a high level the research was motivated by looking at the kinds of unintentional mistakes advisers could make that cause irritation with their clients,” Morningstar’s global head of behavioural insights, Ryan Murphy, said recently while in Australia.

Morningstar focussed on 15 distinct behaviours that were known to irritate clients and asked survey participants to rate how frequently they experienced each behaviour.

“These are the sorts of things that we see can really gum up a relationship. This can undermine trust, the willingness to recommend an adviser to others, and that’s how practices grow,” Murphy said.

“Rarely are advisers fired. We found it happens less than 6 per cent of the time or so, that households would fire an adviser. But that doesn’t mean there’s 94 per cent engagement. And we did find that there’s a decent size of households that are reporting ‘Yeah. It really irritates me when the following things happen’.”

In many instances the frequency with which households are saying they experience these behaviours are between 70 and 80 per cent, according to Murphy.

The survey found that the top seven irritating behaviours to clients were:

1. Not explaining fees
2. Taking more than a week to complete tasks
3. Using jargon
4. Not considering a client’s values
5. Not providing enough details
6. Making the client fill out long, complex forms
7. Not providing holistic advice

Murphy points out that using jargon is a very quick way to irritate a client and lose trust.

“I think that advisers are not trying to do that on purpose, necessarily, but it’s just easy to fall prey to that,” he said. “And when advisers are then talking to clients, they have to remember, okay, this is a very different base, it’s a worthwhile reminder just to slow down and check oneself.”

He suggests that advisers could put explanation text into AI and ask the AI to explain it back to them like they were 10.

“I’m not suggesting advisers should talk to their clients like they’re 10. But as it turns out, that’s a really stringent filter that can check for acronyms, jargon, and superfluous verbiage,” he says.

When it comes to not explaining fees, Murphy says that while clients may understand they are paying a fee for their advice, they don’t necessarily understand what that fee is covering.

“What advisers, especially in Australia, can do is highlight the best-interest standard, which is required here, which I think has substantial benefits,” he says.

But even then, it is important for advisers to explain the value-add they provide.

“There’s good research – Morningstar has done it, other firms have done it – that persistently shows that people who work with financial advisers enjoy long-term benefit from doing so. They get more returns because they’re able to do what they need to do now, stay on-track and avoid the kinds of pitfalls that can ensnare people if they don’t have good advice,” Murphy says.

The research also looked at what kind of investor was more likely to be irritated by the ‘faux pas’ and found an interesting connection between financial literacy and the disliked behaviours. The more financially literate an investor was, the more they reported disliking each of the common adviser ‘faux pas’ and the greater the negative impact of these behaviours on their relationship with their adviser.

But the strength of the relationship a client has with the adviser may compensate for sometimes being annoying. Overall, investors reported fewer negative emotions toward these behaviours when they interacted more frequently with their adviser.

An enduring finding that Morningstar has across all its behavioural science research is simply the importance of goals in understanding what clients are trying to accomplish. This also speaks to a number of the irritating behaviours clients have, such as not considering a client’s values and not providing holistic advice.

“The more that investing can be recast as a goal-seeking activity rather than a market-feeding activity, the more effective [advice can be]. We don’t have a magic wand to make people more rational. But if we can start to recast what the investing process is about and align expectations, then you have a chance to make irrational decision-makers make more rational choices,” Murphy says.