In any relationship, both parties have expectations – whether between spouses, business partners, friends or even financial advisors and their clients.
And when relationships last over time, that's a sign both parties' expectations are being met. But when you're a financial advisor, what does it take to ensure you're meeting clients' expectations without sacrificing your own practice standards?
We spoke to two advisors get their take.
An advisor must ask him/herself this question first. What expectations are you trying to meet? Client service standards, or client investment-return hopes, explains Dan Hallett, CFA, CFP, vice-president and principal at Highview Financial Group.
"Meeting return expectations is always a challenge," he says. "Of course, that challenge is always diminished in a bull market [when share prices are rising], but the risk is that the client's expectations are set during a bull market … and then not readjusted when the tides inevitably turn [and share prices drop]."
Recent reforms have changed how investment returns are communicated to individual investors; they may provide advisors with a new tool to help effectively manage client return expectations. As a result of overhauled disclosure rules that came into effect in January, Canadians' investment fund statements now include a "personalized" rate of return.
The new client reports are the latest step in the implementation of a comprehensive reform package, the Client Relationship Model, first approved by the Canadian Securities Administrators in 2012. The new reporting standards are part of the third and final phase of the Client Relationship Model (or CRM2) initiative which first began in September of 2009.
In previous years, performance information was presented using what's called a "time-weighted" rate of return methodology. This approach shows the performance of an investment for a specified time period, such as one, two or five years, and is most useful for comparing the performance of two or more funds over the same period of time.
The time-weighted rate of return, however, will not correspond to the return experienced by most individual clients. Instead, it would only match individual returns if the client deposited a lump sum at the start of the period under review, and then made no additional deposits or withdrawals during that period.
An alternative way to calculate performance, and the approach specified by the CRM2 reforms, is to use the "money-weighted" rate of return, which accounts for any cash flows into or out of the fund in the period. The money-weighted method is often called an "internal" rate of return, as it factors in both how much an investor buys or sells throughout the reporting period and when those transactions occur.
Closing the loop
"The CRM2 reforms help because they give a client a number – an indication of how their portfolio has performed over time – when previously they had nothing [that was personalized]," says Mr. Hallett. "The main issue, now, for advisors is to ensure they don't let clients interpret those numbers, whether market returns or their individual portfolio returns, without providing context in the form of explanation and support."
Ideally, says Mr. Hallett, when an engagement starts, the client and planner will discuss the portfolio's expected returns, and the CRM2 statements then can be used to "fill in the blanks" about how the clients' funds actually perform over time: "With those two pieces in place, we now have a goal, and a measure of how performance met, or failed to meet, that goal."
Agree on standards in advance
Fee-for-service financial planner Sandi Martin, of Spring Financial Planning, says client expectations for financial planning services can be distinct from investment performance.
When clients are not measuring success in their relationship with an advisor based on investment performance, service standards – such as how frequently and lengthy meetings might be – become much more important.
The key to success, Ms. Martin says, is "setting and resetting expectations as you go along with the client. What that looks like in practice is defining and communicating in advance what the service engagement will look like, and then returning to that defined standard when you or the client have questions about the planning process – especially if that process goes off the rails."
Ms. Martin points to Michael Kitces, a U.S. financial planner who publishes a blog and newsletter for financial advisors. In a 2016 blog post, Mr. Kitces notes that while most financial advisors "have succeeded by providing service that retains their existing clients," there's no clear and consistent definition of what "great service" is: "What constitutes 'great' is truly in the eye of the beholder.
"If you're working with a retired client, 'great service' might reference your willingness to meet during the day at a time convenient to them. But if you're working with a client who is still employed, 'great service' might mean your willingness to meet at night," writes Mr. Kitces.
This point of view is echoed by Ms. Martin, who says that "client service standards allow you to provide opportunities to see any mismatches between your service offering and what the client expects early on – so you can adjust the relationship in response. In the end, meeting client expectations comes down to how well the client understood the value you provided … and that, in turn, starts with how you communicate value in all of your interactions with the client."
Both clients and advisors will have expectations for their relationship.
In looking at managing client investment performance hopes, Mr. Hallett notes the importance of CRM2 in providing an additional tool, in the form of "personalized returns," for deepening communication with clients.
For Ms. Martin, in a financial planning engagement, clearly setting service standards, and "resetting" those standards as necessary, is the most vital element in making sure expectations can be met over time.