by Alan S. Horowitz
Lynn Ballou, CFP®, managing partner of Ballou Plum Wealth Advisors in Lafayette, Calif., began her firm with partner Marilyn D. Plum in 1998. "Everything was lovely when we started," recalls Ballou. "Then we hit the tech wreck, 9/11, Enron. It became a different world."
She and Plum were not prepared. "We lost a surprising number of clients because they held us accountable for what happened," says Ballou.
Why do clients hold advisers accountable for situations like 9/11 and Enron that could not be predicted? Unreasonable expectations. And generally, unreasonable expectations result when an adviser does an inadequate job managing client expectations. The costs of doing a poor job managing expectations can be high, including time spent dealing with unhappy clients, stress on staff and loss of clients.
"Managing client expectations may be the most important thing we do for our clients. If we don't do an adequate job of managing expectations, we set ourselves up for a failed relationship," says Peter F. Tedstrom, CFP®, partner at Brown & Tedstrom in Denver.
Set a Firm Foundation
Virtually all advisers good at managing expectations rely on communications to establish realistic expectations and maintain them over time. Harrison Lazarus, CPA, of Harrison Lazarus Advisors in San Francisco, says expectation management must start at the beginning of the client-adviser relationship.
His first step is to hold a series of three clearly thought-out meetings to learn about the clients and to communicate what the clients can realistically expect. The first is the discovery meeting where he covers:
- The clients' current investment positions
- Where they want to go (their goals)
- Why they want to get there
- How they will get there
- When they will get there
"I want to make clear to the clients what they will get when we work together," says Lazarus. "Here is when I learn what their expectations are."
This is followed by an implementation meeting, which involves presenting a plan of what he will do and what the clients can expect. Forty-five days later, a third meeting is held that covers how the implementation went, and whether both the clients and Lazarus did all they had agreed to do during the implementation meeting. In this way, Lazarus clearly sets up a firm foundation for all future client expectations.
To effectively manage expectations, you need to understand your clients. "We try to get clear on their expectations before we try to manage their expectations," says Tedstrom.
Ask the Right Questions
Do not open a first-time meeting with an informational question such as, "Have you worked with an adviser before?" Or, "What brought you here?" warns Diane MacPhee, CFP®, a business coach to financial advisers. You need a sense of who they are. Ask something like, "What are your greatest financial concerns?" Your first task is to learn about them.
"View every prospect as a unique person to get to know. Be curious and ask gentle questions of him or her," MacPhee recommends. "It's more about really listening well to the person in front of you. The only way to do that is to get the person to open up and talk to you."
Meet in Person-Make It a Priority
Ballou typically has five or six meetings with a new client within the first two months of their relationship and as many as 20 in the first year, with some held in person and others on the phone. She insists on meeting with clients in person at least every quarter for the first year and three times a year thereafter.
Alan Galinsky, ChFC, president and founder of Arch Financial Group in Boca Raton, Fla., holds mandatory quarterly meetings with clients, though he will do webinars with clients in distant locales. On why he emphasizes face-to-face meetings he says, "Ninety percent of information we receive when communicating is nonverbal. A lot gets lost through email and phone conversations. My ability to use a chalkboard and to answer questions on the spot improves our level of [client] retention." Galinsky also communicates via a corporate Facebook page and monthly emails.
Howard Kramer, CFP®, AIF®, of H.A. Kramer & Associates in Plantation, Fla., holds monthly or more frequent phone calls with each client and quarterly face-to-face meetings. He warns advisers against moving too fast. Some clients, he notes, have built up a lifetime of unrealistic expectations and think they may be entitled to various rewards. They expect markets to work in unrealistic ways or that the financial adviser can do certain things.
"Too many advisers get into implementing plans right away because they have a conversation with a client," he warns. "You need to have a sense of the client's expectations in general."
Educate to Set Expectations
Keeping in touch is important, but not enough. Advisers rely heavily on education to help manage expectations.
"If you think about expectations, if you don't have any knowledge, you can't know what to expect," says Galinsky. "The key is education."
Galinsky recommends advisers view the time given to education not as time spent, but time invested. No matter how sophisticated or unsophisticated, all his clients receive an education. "This avoids having to put out fires later on," he says.
Bruce Barton, CFP®, CFA, principal of Parkworth Wealth Management in San Jose, Calif., likes to educate his clients in Monte Carlo analysis as a way to manage expectations. Recently, a client couple came to see him. The third quarter of 2011 was a tough one, but they were not unhappy because they saw-via their Monte Carlo analysis-that the likelihood their financial plan would be a success increased from 93 percent to 96 percent (they have quite a few years before they retire).
"My clients couldn't tell you their quarterly returns, but can tell you their Monte Carlo expectations," says Barton. "That's a key tool for me."
Lazarus invests time analyzing and educating clients on the implications of their goals. Recently, a 42-year-old client said he wanted to retire at 57. Using various analyses, Lazarus demonstrated that to accomplish this goal the client was required to cut current expenses in half and work half-time from age 57 to 65. This educational process illustrated to the client he was spending more than he should if he had any hope of reaching his goal.
"I find that clients often have unrealistic expectations about spending," says Lazarus. "If they earn a good living and max out their IRA/401(k) contributions, they think that's enough to meet their financial goals, and they can spend pretty much all they want."
Ballou says she talks endlessly about education and matching goals to clients' lives. One way she does this is to use a computer program that shows the effects changing various parameters will have on a client's goals and objectives. If, for example, a client goal is to retire in five years, she shows how this will affect the client's income during retirement versus working longer. This is always the first part of the educational process because she wants to make sure the client's goals and objectives are realistic.
The next step involves educating the client on the investments he or she currently has. Using the portfolio as a living classroom, she discusses in depth each investment. Oftentimes, clients are not knowledgeable about what they own. They may say they own no stocks but own mutual funds, not realizing most mutual funds contain stocks.
From this step, Ballou moves on to a more comprehensive education about investments. She discusses the types of investments available, their attributes and history. Then she determines the client's comfort level regarding risk. "How much cash do they need so they can sleep well?" she asks.
Communications and education are keys to expectation management. As MacPhee notes, "It's a partnership between the client and adviser. It's not all about you doing the right thing. The client needs realistic expectations."
Alan S. Horowitz is a freelance writer and previous contributor to Practice Management Solutions magazine. He wrote about how to fire clients in the November/December 2011 issue.
