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Hearing other voices: why guilt by association could prompt a client to exit

Most financial advisers know well by now that two of the most important ways of attracting new clients and retaining the clients they have is to generate referrals and to stay on the right side of the law. But CoreData’s research reveals there’s another line advisers cross at their peril.

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CoreData’s research confirms that far and away the most important criteria individuals use when they’re looking for a financial adviser is a recommendation from someone they know. It is almost three times as important to them as an adviser rating or review, and more than five times as important as an adviser promising them strong investment returns.

And while the research confirms that breaking the law and provoking action by a regulator is one of the events most likely to make a client stop using an adviser’s services, it also reveals that action by a professional association can be just as big a spur to a client leaving.

This week the Tax Practitioners Board (TPB) and the Financial Planning Association (FPA) signed a memorandum of understanding to share information between themselves regarding adviser misconduct. CoreData’s research suggests disciplinary action by either association will resonate with the affected advisers’ clients.

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Around half of all clients, irrespective of whether they have an ongoing relationship with an adviser or seek advice only periodically, say action by a professional association against their adviser would make them stop using the services of the adviser. That’s roughly the same proportion of clients who say action by a regulator would prompt them to leave.

Action by a professional association is significantly more likely to convince a client to leave their adviser than suffering an investment loss over one, three or five years. It’s more likely than bad press to make a client terminate an adviser, and it is more than twice as likely as an increase in advice fees to prompt a client to leave.

It’s even more likely to make a client reconsider using an adviser’s services than if that adviser were shown to be ripping clients off, even if the client were not directly affected.

It’s not the licensee

Retaining existing clients makes good sense when you consider the time and effort it takes to onboard a new client to replace them.

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The name or reputation of a licensee is unlikely to be a major drawcard for a potential new client. CoreData’s research shows that only around a third of clients actually know the name of their adviser’s licensee.

In fact, only one in every seven ongoing advice clients (13.9 per cent) even know the adviser has a licensee.

And only around a quarter (23.8 per cent) of clients who seek advice periodically know their adviser has a licensee. Only about a quarter of clients who have an ongoing advice relationship not only know their adviser has a licensee, but also who owns the licensee.

If an adviser isn’t generating referrals from existing clients, then the avenues for attracting new clients are limited. Less than a quarter (21.6 per cent) of people looking for an adviser would base their selection on a rating – possibly because the rating is not from someone they know personally. Sponsoring events or organisations the potential client cares about are not important. Nor is being quoted in local media.

And it’s not investment performance

Promises of high investment returns don’t figure much either. Investment returns are an interesting issue. They’re not enough to convince a client to use an adviser’s services, and once a client is on board, poor returns alone are unlikely to prompt a client to leave. 

Not too many clients at all (21.8 per cent) would leave an adviser if they suffered an investment loss over one year, if they had an ongoing relationship with the adviser. Clients who seek advice periodically appear to be slightly more sensitive to short-term losses, however, with just over a quarter (25.7 per cent) saying a loss over 12 months would be enough to make them stop using the adviser’s services.

If a loss were incurred over three years the proportion of clients who would stop using their adviser grows to almost a third (31.1 per cent), but even a loss measured over five years would prompt just over a third (37.2 per cent) of clients to stop using the adviser’s services.

Overall, though, this is good news for an industry seeking to reposition itself as a profession, with practitioners delivering a broader range of services and guidance to clients than just investment returns and behaving as more than just supposed investment experts.

And if the public is starting to treat seriously what professional associations say about the standards and behaviour of their members, that’s a positive development for an emerging profession as well.

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