Study on value of advice shows emotional bridge-building is key for advisors to reap business benefits
At times like this, it’s almost too easy to trot out that oft-repeated piece of advice to investors: make emotion-based investment decisions at your peril. But emotion can also form a crucial part of an advisor’s value proposition and a driver of sustainable business.
In a paper titled The value of advice: Assessing the role of emotions, researchers found that emotional elements, such as trust and personal connection with an advisor or advisory service, account for about 40% of investors’ perceived value of financial advice. The remaining 60%, they determined, is linked to functional aspects of the client-advisor relationship, such as portfolio management and financial planning.
Through a research design that includes in-depth interviews and a broader survey, researchers looked at how 24 key value investors play into advised investors perceptions of the value of advice. Each attribute was defined as either emotional or functional.
“Our research demonstrates that the attributes that drive the emotional value of advice are dependent upon the type of advisory service an investor uses,” said Anna Madamba, senior researcher in Vanguard Investment Strategy Group and one of the paper’s co-authors.
For traditionally advised investors, a financial advisor’s value is made up of components centred on two themes.
The first, relationship with a trusted advisor, is composed of designated emotional attributes such as trust, personal connection, and proactive outreach. Functional attributes — including constant plan monitoring, expert perspective, and visibility of portfolio changes — can also play an important part in the relationship.
The second theme, service, is more focused on functional attributes such as developing a customized financial plan, maximizing investment returns, and third-party financial mediation.
Meanwhile, researchers found three themes that fed robo-advised investors’ perceived value of all-digital advice services: transparency, empowerment, and interaction with the service. The key attributes supporting online advice services’ value include trust, constant plan monitoring, time delegation, and the need for control.
“Advisors need to understand what their clients value—and conversely, what they don't—so they can prioritize the most meaningful aspects of their relationships,” said Tom Rampulla, managing director of Vanguard Financial Advisor Services.
“The business benefit of this study for advisors is tangible, as trusted advisors receive increased client loyalty, incremental growth in managed assets, and lower levels of client attrition,” he added.
