Executive Summary
A common debate in the financial planning world is what we can do to make clients less focused on the short-term volatility of the markets. As the viewpoint goes, if we can help clients to pay less attention to the markets, they won't be so stressed in times of turmoil and will be less likely to make rash, impulsive decisions like bailing out in the midst of a downturn.
Accordingly, one common conclusion is that as planners, we should send statements to clients less often; after all, if we don't want clients to look at the markets so much, why do we keep sending them so many reports about what's going on in their portfolio?
Yet a recent new service for advisors, that in part provides even more regular reporting for clients, is discovering that the opposite may be true: that in fact, the best way to calm clients is not less reporting and information, it's more... as long as it's clear and relevant and puts the situation in context.
The inspiration for today's blog post was an article from a few months ago on the website for Blueleaf (a web-based platform to consolidate portfolio and client information for both advisors and their clients) that I recently discovered, discussing the so-called "CNBC Effect" (a high volume of loud, fragmented noise about markets just makes us more stressed), and the idea that there is a difference between lots of "noise" information about markets, and lots of good information about markets. The most striking aspect of the article - and a follow-up conversation I had with Blueleaf CEO John Prendergast - was that in reality, clients who received more frequent portfolio information were actually reporting less stress, not more.
Wait, what? Isn't that the exact opposite of what we've all been talking about for years? How could throwing more information at clients about the ups and downs of their portfolio actually make them feel more at ease? Wouldn't it just accentuate how much volatility is in the markets and freak them out? What gives?
It would appear that perhaps most clients ultimately are succumbing to what is truly the greatest fear: the unknown. In other words, notwithstanding the frequency of quarterly statements, for a client who sees terrifying new headlines of market turmoil, quarterly doesn't feel like "frequent" - it feels like eons. And given that most surveys show the number one reason a client leaves an advisor is "lack of communication" even while quarterly statements are a staple of the industry, perhaps Blueleaf and Prendergast are on to something here... maybe the problem really is that reporting is not frequent enough.
Of course, I can still hear many readers thinking "but still, isn't more frequent reporting just going to make clients even more obsessed and fixated on the markets and their portfolios?" Apparently not. As Blueleaf is finding, clients who access their reports more frequently actually contact their advisors less frequently with questions and seem to be less stressed about the markets. After all, since most planners keep clients in rather broadly diversified portfolios, the reality is that regular reporting should be good news. If the CNBC headline is "market declines 12% in two weeks" the client may be relieved to see that in fact the well diversified portfolio is only off 5.5%.
Notably, "more frequent statements" doesn't necessarily mean killing another forest of trees sending more paper statements. It could mean more frequent delivery electronically, or perhaps just an effective portal where clients can see where they stand financially whenever they want (but reported in a consolidated manner with the information that's relevant to the client; not scattered account by account with ineffective information!). In point of fact, Blueleaf is one of the providers of solutions to this challenge, but nonetheless their point about frequency of reporting seems credible, notwithstanding their self-interest in discussing the problem.
I have to admit, I think Blueleaf may be on to something here though. Survey after survey in the industry shows that, especially in declining markets, the #1 reason that clients fire advisors is "insufficient communication". Given that quarterly statements ARE the standard in the industry right now, this would imply that even quarterly is not enough to address client concerns when scary things really are happening. Perhaps accessibility to more regular aggregated performance information really can calm clients, helping them to take their minds OFF the portfolio, instead of fearing the unknown of how they're doing and obsessing about it even more?
So what do you think? Is it possible that the key to calming clients in volatile markets is really not less frequent performance reporting, but instead increasing the frequency? Does regular reporting make clients more investment centric, or scratch the itch of curiosity about how their portfolio is doing and make it easier for them to let go and relax?
