Transparency is key to trust

by Hansi Mehrotra

3rd June 2014

Private clients rate advisers on efficiency and effectiveness. But advisers need to work on transparency to improve trust. Charlotte Beyer, founder of the Institute of Private Investors, offers a framework to understand client psychology based on her experience working with ultra high net worth investors for more than 20 years.

Behavioural finance is becoming mainstream – at least in discussions, if not in practical application in wealth management. However, past research on investor psychology has often used data from discount brokerage accounts is not relevant to high-net-worth clients of a private bank or private client firm.

One framework for understanding client psychology is to think of the investor–adviser relationship in terms of IQ and EQ, suggests Charlotte Beyer, founder of the Institute of Private Investors, based on her two decades experience working with ultra high net worth investors. IQ, represents the intelligence, knowledge, and expertise of the adviser while EQ represents the emotional intelligence, empathy skills, and emotional maturity.

A private client may plot the adviser in one of four quadrants using the two axes. So when client describes the adviser as follows: “She really ‘gets’ me, knows my needs and goals, serves me well, and genuinely cares about me meeting those goals. She has delivered solid returns at a risk level I can live with, she impresses me with her knowledge of and experience with the markets, and the reports I get are clear and give me an excellent idea of how I’m doing,” he is putting her in the upper right high EQ/high IQ quadrant.

The other extreme could be “He has that ‘voice’ like the talking heads on CNBC, and he says the same thing over and over as if I am deaf or dumb or both. He really cannot know me, or he would not bore me with all the chatter. He seems more interested in being right with his strategy than discovering what I might need” (low EQ). He kept telling me to ‘stay the course’ and did not discuss with me how I was feeling or whether I could stomach that course. He did not make one defensive move in my portfolio, so I did worse than the market! His excellent past track record didn’t do him (or me) any good in 2008. He didn’t even call to warn me about my December statement, which showed a huge 40 percent decline” (low IQ).

Another way to label the axes is with efficiency on the vertical axis and effectiveness on the horizontal axis. A happy client (upper right quadrant) might describe how timely and complete the reports are (efficient) and marvel at how consistent the communications are, always clearly capturing the key points in an executive summary and letting the appendix tell the rest (effective).

In contrast, a frustrated client (lower left quadrant) might say: “We get this massive report each quarter that I don’t even like wading through (ineffective), and if that were not enough, there is always a slightly different order to it and never a complete table of contents. How do I find one chart among eleven of them in an appendix without a listing of the charts (inefficient)?”

“All of these descriptors measure the client’s experience. When experience does not equate to expectations, the risk of losing that client increases enormously. Ultimately, clients’ perception is the reality of their experience,” Beyer says.

The longer the period of time in which expectations align with experience, the more trusted the adviser—and the more loyal the client. But how can an adviser be sure the private investor’s expectations are realistic and will equate to the experience?

“Two areas in particular are key: (1) technology and transparency and (2) empowering clients by giving them an opportunity to revisit and reset prior decisions and expectations. Indeed, from the client perspective these two categories are linked,” continues Bayer.


Technology and transparency

Developments in technology are transforming the investor–adviser relationship in four areas: clarity of reporting, risk-adjusted returns, fees, and measuring the quality of advice.

First, client reports are capturing what clients need to know even before they know they should ask for that data. Graphs, charts, and other visual aids can replace 10 pages of numbers. One-page executive summaries also quickly enable clients to understand how they are doing.

Second, investment firms are no longer reporting returns without citing risks. And risk is defined far more broadly than simply standard deviation. Risk includes liquidity risk, asset-liability modeling etc.

Third, investors have learned to ask about fees and expect full disclosure. They often compare fees inside an online community.

Fourth, technology already has had an enormous impact on how advice is measured. Online communities, databases, and master custodian reports have far more information than was available even two years ago.

Reviews to re-visit and re-set

Investors need to be able to revisit prior decisions, outcomes, and expectations in light of new environments—such as a death in the family or market conditions—and, if necessary, reset their investment policies. Investors are reclaiming their own power to manage the decisions made “on their behalf.

For advisers, outcomes and expectations first must be specifically defined, understood, and accepted and then must be clearly communicated. Both the client and the adviser need to accept that successful wealth management is a journey, not a destination.