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?
In my firm, I’d be surprised if the more frequent provision of only portfolio/investment information were helpful to clients. I’d think instead that that information could have the beneficial effects you mention only if the portfolio information were presented *in context*. Examples of context could be general economic/market data (S&P 500 dropped 10%, and here you see that your portfolio dropped only 5%) or, even more helpfully, client-specific data (your investment timeline is 30 years ’til retirement, therefore you have plenty of time to recover from that 20% drop you’re seeing). Providing access to portfolio data is a purely a technological problem, whereas providing useful, de-stressing context could involve a lot more time, thought, and expense.
Meg,
Indeed, part of the point here is that if we proactively give clients performance information, we get the luxury and privilege of controlling HOW that data is presented. WE can deliver it in context, if WE deliver the information.
If we insist on only delivering statements quarterly – or worse, reduce it to annually – I think we’re deluding ourselves to pretend clients will just not ask any questions all year long. They’ll want to know how they’re doing from time to time, for any number of reasons. And if we don’t give them the information – WITH the context we can add to it – they’ll just see it directly, on their custodian statements, in a fractured, out-of-context situation that may only make them freak out more, not less.
The point is not to make clients look at their performance 365 times a year instead of 4 times a year. The point is that if they’re only going to look 4 times a year, it should be THEIR choice which 4 days those happen to be; not because we decided to send them the information because it happens to be June 30th or some other quarter-end date!
Respectfully,
– Michael
Michael and everyone- this is an interesting issue and one we have just recently dealt with. For several years I have been concerned that quarterly performance reporting worked at cross purposes to our long term, goal focused “purposeful portfolio” concept. We just changed our reports and eliminated the quarterly performance but kept 1,5,10 year #’s. So far most like it. We try to communicate via our Blog,fortnightly e-mail newsletter and other means to combat the CNBC effect .
Bottom line- we think more reporting is not useful to their long term goal attainment unless their long term goals have changed. Good topic ! James
In some ways, this discussion of quarterly vs. annually is moot, as our clients get *monthly* account statements from Schwab (our custodian), even if we only send out quarterly newsletters/performance statements. For a personal example, my mother, who engaged a financial planner because she simply Does Not Care to think about this sort of stuff, still comments every month (at least lately) about how her monthly Schwab statements bleed red.
Frequent reporting doesn’t have to be performance-related, especially not short-term performance.
Consider the desired message for most clients: yes, investing involves risk and exposes you to volatility, but you hired us to make sure that you look beyond short-term performance and focus instead on what’s important: doing what you can to meet long-term goals.
I don’t believe one communicates that message with a “Your portfolio’s performance was X% for the last quarter,” and then sending that report quarter after quarter.
Bill,
I have to admit, I’ve heard this case made before by many advisors. I’m just not convinced.
Clients don’t want to know how they’re doing on OUR schedule (when we send our quarterly report, or annual report, or whatever). They want to know how they’re doing on THEIR schedule. When it matters to them – for whatever reason they want to know.
Can you imagine what would happen if the bank said “we think you’re focusing too much on short-term volatility; we’re only going to tell you your bank account on a quarterly basis.” Or if Schwab said that to their account holders? Or Pershing?
We wouldn’t dream of it. It’s the antithesis of transparency and clarity for clients.
So if we believe people should have access to their information anytime they want it in virtually every other context, why is it appropriate to hold their performance data hostage?
As I’ve noted before in this blog, WE have created the story that “clients are so obsessed about performance because we send them so many statements.” I think that’s… B.S. Clients are obsessed about performance because it’s THEIR money and they want to know how the heck they’re doing. Withholding that information from them will NOT calm them and make them care about it less; to the contrary, the evidence suggests it will just make them fear the unknown and freak out even more!
Respectfully,
– Michael
Sorry Michael, I didn’t intend to imply that performance information should ever be withheld from clients.
I said that pounding short-term performance charts down clients’ throats every 90 days sends the wrong message.
Let me be clear that I believe clients should be able to view their portfolio information, including performance if they want, anytime on any device. But I feel advisors mistakenly reinforce short-term thinking with performance reports delivered every 90 days.
I would agree reporting more often is better. But I would argue even more strongly that reporting the right information is even more important.
Portfolio performance is a poor proxy for what clients really care about (i.e., does my life need to change). If they can see each day that their goals are secure, they will sleep like babes.
Ultimately, a client should be able to log onto their advisor’s client site and see a set of green/yellow/red traffic lights on the security of their goals. Whenever they are nervous, they can log in and if they are showing all green, can feel their anxiety float away.
Of course if things are not all green that is a good time to start the tough conversations.
David
David,
I think this speaks to part of Meg’s point earlier, which is that it is definitely important that we give proper context to results – not just blind performance numbers, but how they relate to goals, whether goals are endangered, etc.
But I guess I still have concern that in the short-to-intermediate term – ultimate we have the silver bullet of reporting mechanism – that trying to cut back on reporting frequency (which I see as an emerging trend discussion) is a step in the wrong direction. We may view it as “business efficiency” and “making clients more long term” but I have a real fear that clients will simply experience it as “you’re trying to hide the results of what’s going on with my money.”
– Michael
I wonder if “insufficient communication” from the advisor has much to do with performance reporting. I think many clients feel abandoned by their advisers once the sale is made or the assets are under management. Clients leave because advisors have not shown interest in the clients’ well being not due to the frequency of statements.
Rob,
I don’t mean to imply that “just” sending statements is the sole successful act of effective communication with a client.
At the same time, though, I have a LOT of trouble believing that a refusal to send regular statements wouldn’t exacerbate the problem!
– Michael
Has anyone out there tried Blueleaf? I’m going to take a look at it but was just curious if anybody utilizes the service and could provide thoughts. I’ve been looking for a reasonable alternative to advent.
Michael,
I don’t know any Blueleaf firms offhand, but I’m sure if you contact them, they’d be happy to give you references to check out. 🙂