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The Power of Expectations: How Financial Advisors Can Improve Client Retention

publication date: Jun 25, 2014
author/source: Brian Nelson, CFA

There’s a reason why Twitter (TWTR) is one of the most successful social media news outlets today. The same reason may be why football has largely replaced baseball as the most popular sport in America -- despite baseball tracing its roots to the Civil War in the mid-19th century. This reason, too, may be why motor sports (think NASCAR) are America’s second-most watched sport after football. Look at the popularity of casinos. And of course, how can we forget when people quit their jobs in the late-1990s to become day-trading experts at the peak of the dot-com bubble—only to lose it all. Oh, and the excitement of winning the lottery!

The reason behind these phenomena is more behavioral than anything else: people want things fast and they want action. People are simply hard-wired for excitement. In the investment world, we can probably blame the 24/7 business news networks for this. The networks need to sell advertising, and they exploit people’s affinity for fast-moving action to capture their eyeballs. Investing is not fast-moving, so the news outlets have made it so. The news now has earnings alerts, breaking news, and real-time interviews at all hours of the day. If investing was so fast-moving, how can the networks get all these interviews from money-managers? Shouldn’t they be glued to their trading screens? The networks have somehow made accounting sexy. A firm’s gross margin is now watched more closely than a model walking down the red carpet. It’s enough to make viewers’ heads spin. And their heads are spinning.

To a tried-and-true fundamental investor, it’s unfortunate that this is so. Today, the financial advisor has to practically retrain his/her clients to teach them that investing is not the ‘news’ he or she sees on television every day, but instead, investing is a pathway to achieve financial goals. Financial advisors need to make it clear that the news on television is to sell advertising – the networks don’t care about the viewer’s financial returns. The shows are to get people to watch. There’s a whole world of difference between what people perceive investing to be -- and what it actually is.

But how can financial advisors deal with a client’s innate desire for immediate gratification (by immediate, I mean within a few years) and continued excitement? How can an advisor prevent his or her client from just churning and burning themselves? And most importantly, how can the advisor prevent the client from leaving, only to be lured into some exotic trading strategy that leaves them penniless?

The answer is not easy, nor is it uniform for every client and every advisor, but setting goals early and explaining how you will go about achieving the goals in layman's terms (and with complete transparency) is the best way to earn trust and improve client retention. We can point to a widely-known fact of the markets as to why setting expectations is so critical. When companies issue better-than-expected forward guidance, shares generally rise. When companies issue worse-than-expected forward guidance, shares generally fall. In many cases, it is not how the financial advisor performs but how the client expects the financial advisor to perform that makes all the difference. In this light, the financial advisor needs to make it very clear that investing is to achieve a client’s financial goals after considering their risk tolerances – investing is not how the news-driven media outlets convey it on television.

The same dynamic is also true in the investment-research publishing business. In our newsletter portfolios, for example, we have set clear goals. In the Best Ideas portfolio, we set out to beat the market benchmark every year and to achieve positive returns each year regardless of the broader market environment. In the Dividend Growth portfolio, we seek to hold firms with strong and growing dividends and achieve a high-single-digit rate of return over rolling three-year periods. We haven’t had one member tell us that they are dissatisfied with the returns of either portfolio.

Whatever the goals you pursue with your clients, make sure that your clients not only know what you are doing, but also the tools you are using to achieve those goals. For example, we use the Valuentum Buying Index to inform which firms we add to the Best Ideas portfolio. We use the Valuentum Dividend Cushion ratio to inform which firms we think will be the best dividend growth stocks in coming decades. We strive for transparency in our methodological processes, and our members know exactly what we are trying to do.

It’s extremely important to convey to the client periodically that, if portfolio construction is performing precisely according to plan (and maybe even exceeding expectations), generating turnover solely for the sake of client excitement is only detrimental to the process (and may be imprudent). It should be clarified that a financial advisor is not lazy or performing poorly as a result of inaction, but if performance is as desired and the plan is on target, the advisor has done his/her job with flying colors.

It’s equally important that financial advisors convey to clients that low turnover is almost always a good thing--it means that the stocks or investment vehicles that were originally selected have performed as desired. For example, the relatively low turnover of the Best Ideas portfolio is a function of the tremendous success of the constituents in the portfolio—and that we expect these constituents to continue to meet the desired goals. Low turnover doesn’t mean that the client is not getting his/her money’s worth. In fact, low turnover means that the client is getting more than his/her money’s worth—as the advisor that does things right the first time saves both time and money. High turnover, unless targeted specifically in the context of the strategy itself, almost always means that a strategy is failing.

But despite the best efforts, financial advisors should accept the very real fact that it’s impossible to please everyone all of the time. Clients can leave for almost any reason, and sometimes it’s just not fair when you’ve done a fantastic job for them. Some may take your plan and execute it themselves--and not pay you for it. These types of clients aren’t the ones you want anyway, particularly if they lure you into doing things you know are just plain irresponsible (i.e. trading every week or striving for unreasonable or unattainable goals). Most experienced financial advisors have learned to just not accept their business.

All told, setting expectations up front with clearly-defined goals, explaining in layman's terms how you plan to achieve the goals, and conveying that success equals achieving the goals (not churning and burning with new idea after new idea), a financial advisor is in a much better position to retain clients over the long haul. And most importantly of all, setting appropriate expectations could very well mean the difference between a happy client and a lost client – even under scenarios where performance is exactly the same. Thank you for reading!

About the author: Brian Nelson is the president of equity research and ETF analysis at Valuentum Securities. Brian is frequently quoted in the media and has been a frequent guest on Nightly Business Report, Bloomberg TV, CNBC, and the MoneyShow.  Prior to Valuentum, Mr. Nelson worked as a director at Morningstar, where he was responsible for training and methodology development within the firm's equity and credit research department. Brian led the charge in developing Morningstar's issuer credit ratings, developing and rolling-out one of the firm's proprietary credit metrics, the Cash Flow Cushion. Mr. Nelson is very experienced in valuing equities, developing Morningstar's discounted cash-flow model used to derive the fair value estimates for Morningstar’s entire equity coverage universe. Prior to that position, he served as a senior industrials securities analyst covering aerospace, airlines, construction, and environmental services companies. Before joining Morningstar in 2006, Mr. Nelson worked for a small capitalization fund covering a variety of sectors for an aggressive growth investment management firm in Chicago. Brian worked on a small cap fund and a micro-cap fund that were ranked within the top 10th percentile and top 1st percentile within the Small Cap Lipper Growth Universe, respectively, in 2005. Mr. Nelson holds an MBA from the University of Chicago Booth School of Business and also has the Chartered Financial Analyst (CFA) designation. Brian can be reached at

This article is a thought piece and should not be construed as investment advice.

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