Emotional factors outweigh financial considerations for those clients seeking investment advice. That’s according to Morningstar Research carried out by Samantha Lamas, Senior Behavioural Researcher and Danielle Labotka, Behavioural Scientist, at Morningstar, as they explain in more detail below.
There are plenty of fish in the financial advisory space, which can make choosing an IFA a complex call for a client. When scouting for a new adviser, clients weigh up a host of factors in the hope of finding their perfect match.
Courting new clients will be a familiar process for any financial adviser. It often entails assessing how you can help clients reach their goals, negotiating fees, and discussing deliverables. While aligning clients’ requirements and your services may be straightforward on paper, the final decision to work together is not always clear cut.
Demystifying these choices is in the best interest of any adviser looking to expand their client base, so at Morningstar, we have taken a deep dive into the criteria that shapes clients’ decision-making processes when hiring an IFA.
Financial factors
Clients looking to grow their savings, plan their retirement, or appropriately manage an influx of cash might seek professional advice on how to do so. They will likely consider the adviser’s fees, track record and success with previous clients, and the financial gains they promise or forecast.
While true – financial advisers are sought out to solve financial problems – this is not the whole story.
In fact, when Morningstar asked investors why they chose their financial adviser, less than half of the reasons given were financial.
More than a numbers game
Our data of current advisor clients suggests that while 40% of factors in investors’ choices are financially related, 60% of these decisions are driven by emotional factors.
This means that if you are approached by five prospective clients, three of those will weigh up their feelings, not just assess financial considerations.
Clients overwhelmingly seek advice as they desire clarity and reassurance, according to the study. While it is unsurprising that specific financial needs rank highly as a reason for hiring an adviser, it may come as a shock that prior discomfort in handling financial issues is an equally prevalent factor.
Trust also plays a huge role, with 10% of clients opting for advisers due to recommendations from friends or family. Morningstar research found that good rapport was another common motivator in the decision to hire an IFA.
Defences up
Although the emotional elements of investing will be familiar to many advisers, their weighting in clients’ decisions may not be immediately evident in practice.
This is because regardless of how influential a client’s emotional needs are, more often than not, they remain unspoken. For instance, a client who is forthcoming when discussing their plans for the inheritance they have received will likely never express the anxiety they feel about the investment decisions they are faced with.
Factoring in feelings
Even though emotional factors are rarely openly addressed, our research suggests advisers should always assume the decision for clients to hire an IFA is motivated by factors beyond openly discussed financial drivers.
Accounting for emotional aspects when pitching your services may be the difference between gaining a new client or losing a prospective one. However, discussing any concerns directly too soon in the relationship could put some clients off.
Rather than addressing any anxiety surrounding financial decisions head on, an indirect manner may be preferable. For example, clients will likely find comfort in hearing about the value an adviser can add through support by providing examples of behavioural coaching in action.
Similarly, demonstrating how other clients have gained peace of mind from your guidance, showing you are aware of how daunting financial planning can appear, and highlighting how you can help them understand the process, can yield fruit.
Language and tone also matter. Previous Morningstar research[1] has found speaking colloquially can help advisers build rapport with clients. Phrases such as “these are issues we all face” can provide additional reassurance.
Handle with care
IFAs are often conscious of the emotional drivers behind clients’ decisions, yet they may be unaware that feelings are the greatest deciding factor in choosing whether to hire an IFA.
Regardless of a prospective client’s particular financial goals, tactfully accounting for clients’ emotional needs can lay the foundation for a robust advisory relationship.
Morningstar’s research can be read in full here
And there’s more…
Earlier in October, Samantha and Danielle recently appeared on our popular weekly IFA Talk podcast. In conversation with IFA Magazine’s Sue Whitbread and Brandon Russell, they delved more deeply into this research about why clients hire their advisers. They also discuss practical steps which advisers can take to avoid falling into the trap.
You can tune in to this excellent IFA Talk Podcast episode #59 HERE
About Samantha Lamas
Samantha is a behavioural researcher at Morningstar. She is a recent recipient of the Montgomery-Warschauer Award for her research in financial planning.
Lamas’ research focuses on investor engagement and the factors that drive people’s decision-making about investing and money. Her work delves into how people think about their financial goals, what they look for when seeking financial advice, and what kinds of mental shortcuts people use when making decisions about their personal finances.
Lamas joined Morningstar in 2016 as a product consultant working directly with the individual investor and advisor audience segments before moving into a research role.
Lamas holds a bachelor’s degree in business with a concentration in finance from Dominican University. Follow Lamas on Twitter at @SamanthaLamas4 and on LinkedIn.Samantha Lamas is a behavioral researcher at Morningstar.
About Danielle Labotka
Danielle Labotka, Ph.D., is a behavioral scientist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She conducts original research to understand how investor and advisor behaviors and biases affect financial decision-making.
Before joining Morningstar in 2022, Labotka was a research fellow at the University of Michigan working on projects funded by the National Science Foundation. Her work has been published in academic journals such as Cognition and Frontiers in Psychology.
Labotka holds a bachelor’s degree in anthropology and comparative human development from the University of Chicago. She also holds a doctorate in psychology from the University of Michigan.
