Demonstrating the full value that financial advisers provide to their clients is notoriously challenging. Historically, the financial advice industry anchored on investment performance as the main source of advice value, but such analyses often failed to consider the emotional component of value that advised clients derive from their advisory relationships.

Here, we draw on Vanguard’s more than 20 years of research on the emotional value of advice and explore how financial advisers add value, or alpha, through relationship-oriented services that go beyond simply managing their clients’ portfolios. In doing so, we attempt to validate a hypothesis that many have long asserted: that emotions play an important role in developing and maintaining strong advisory relationships, which can help drive more successful investment outcomes among advised investors compared with those investing on their own.

First, we begin with a summary of the Vanguard value of advice framework, a key tool to help advisers calculate the added value of their advice for individual clients.

The four sources of advice value

In our paper, “The value of personalised advice”, we introduce an expanded framework for measuring the value of advice with individual clients that identifies four key sources of advice value: financial, portfolio, emotional and time savings.

The sources of advice value

Whilst financial value and portfolio value are delivered through specific activities recommended by an adviser, emotional value and time savings are delivered by the way an adviser produces, explains and implements those interventions and ensures their follow-through.

It is an adviser’s task to proactively monitor their clients’ portfolios and engage when changes are needed. By providing their expertise through relationship-building interactions, advisers earn clients’ trust – one of the primary drivers of successful long-term advisory relationships. Indeed, our studies have found that the most valued emotional attribute of working with an adviser is “to know my financial plan is continuously monitored and updated”.

What is emotional value?

Research shows that investors who work with an adviser experience a range of emotional benefits from their advisory relationships, including peace of mind and confidence in their long-term financial wellbeing. Quantifying the value of these emotional elements, however, is challenging, and can vary from person to person depending on an individual’s unique needs and circumstances.  

Additionally, studies show that the emotional elements of working with an adviser are a significant factor in an investor’s decision to seek the assistance of an advice service.

What component of advice value can be attributed to emotional elements?

Since introducing our first framework for quantifying the value of advice back in 2001, Vanguard’s research has focused on measuring emotional value in two ways:

Quantitative value

Alongside our expanded Vanguard value of advice framework, we recently introduced the Vanguard Financial Advice Model (VFAM). This model facilitates calculations of value provided by advice for individual clients relative to their current investment and financial planning strategies, and uses a utility-based scoring framework which has a focus on the entire range of client outcomes, with an emphasis on mitigating tail risks. The utility scoring approach attempts to measure the life satisfaction, or usefulness, that wealth can provide clients, and allows for the possibility that greater wealth does not necessarily lead to greater outcomes for clients.

Indeed, our research shows that most advice interventions cannot be defined as strictly functional or emotional in nature; rather, they often provide a blend of benefits for investors that include emotional and financial components of value. Examples include: providing a client with peace of mind through behavioural coaching to stay invested when markets are volatile; building a client’s confidence in their financial future by monitoring their portfolio and making adjustments when their circumstances change.

Qualitative value

Perceptions of value matter in advisory relationships: the actual investment value from using an adviser may not be the same as their perceived value of advice; for many clients, the emotional aspects of advice increase their perception of the total value they derive from the advisory relationship.

By positively impacting clients’ perceptions of the value they derive from advice, emotional value can foster stronger long-term advice relationships and can help drive more successful long-term outcomes.

As part of our research, Vanguard conducts qualitative surveys and interviews of advised investors to assess their perceptions of value for different advice interactions. According to one survey, emotional elements accounted for approximately 40% of the perceived value of advice value among human-advised investors as well as those using a robo-advice service.

Some examples of how advisers provide emotional value include:

  • Developing trust with clients as a source of professional expertise, experience and judgment;
  • Helping clients set financial goals and mapping out strategies to achieve these goals;
  • Coaching clients to stay the course through unpredictable market events;
  • Providing peace of mind that someone is monitoring their portfolio;
  • Reassuring clients they are on track to meet their goals, and helping adjust them when personal circumstances change;
  • Keeping on top of a client’s changing life and needs, and making sure that plans stay on course;
  • Saving time for clients by performing time-consuming tasks on their behalf;
  • Offering emotional support and guidance that provide peace of mind to clients and help them stay motivated1.

Behavioural coaching

Along with listening to your clients, behavioral coaching may be the most valuable emotional service you provide. Using behavioural coaching techniques to encourage clients to stay on track with their strategies and avoid reactions triggered by emotion can provide significant long-term value.

These coaching strategies can help ensure clients achieve their long-term goals by addressing the emotional reactions which can lead to poor decision-making. Equipping clients with the tools and techniques to overcome natural human tendencies—for example, chasing returns when markets are rising, or running for cover when markets fall, particularly after an unexpected event—can enable clients to stay on track with their investments and make more rational decisions in line with their long-term investment goals.

The value of human versus digital advice

While emotional value is largely considered to be a human-led component, digitally-advised investors can also benefit emotionally from using digital, or ‘robo-advice’ platforms and services. 

Human-advised investors tend to perceive the value of advice through the lens of their relationship with their financial adviser. Robo-advised investors, on the other hand, highlight their desire for transparency and empowerment when assessing the value of their advice service.

In a survey of advised investors2, respondents were asked to score the importance of different functional and emotional attributes of their advice relationships with an adviser or advice service, and whether they would prefer that service to be delivered by a human or a digital adviser.

Human-advised investors value the emotional aspects of advice

Top-rated human-led interactions:

  • Develop a connection/relationship with me;

  • Is empathetic to my personal situation and needs;

  • Feel listened to and understood;

  • Knows me – feel that I and my retirement goals are understood;

  • Give me trust in the advice;

  • Work in my best interests – take good care of me;

  • Make sure I understand my financial plan and/or goals well;

  • Give me confidence in what is being done.

These points help to illustrate the emotion-related areas where advisers can really add value for clients.

Further, by being transparent with your fees, your processes and your offering can also contribute to obtaining trust from your clients and forging a strong relationship with them.

The value of digital advice

The most highly rated interactions among robo-advised investors were related to functional tasks and portfolio management, such as managing taxes and capital gains efficiently and diversifying investments. These results corroborate the findings of previous Vanguard research3 suggesting that services related to portfolio outcomes are now largely commoditised, and advisers should instead focus on services in which humans excel, such as behavioural coaching.

Digitally-advised clients value portfolio outcomes and functional tasks

Top-rated digitally-led interactions:

  • Simplify for organised, cohesive management;

  • Prevent details, or entire accounts, from being overlooked;

  • Manage taxes/capital gains effectively;

  • Access the most appropriate funds, including in retirement, as they are needed;

  • Diversify investments.

Emotional value for robo-advised clients

For financial advice businesses where many of their processes are automated and clients are robo-advised, it is important to find ways to include emotional value to the robo-adviser/client relationship. Whilst it may be that humans add an extra touch to this emotional connection, there are ways in which you can ensure that your robo-advised clients also obtain emotional value from their adviser.

  • Personalising the experience: robo-advisers may allow clients to customise their portfolios and choose their investment goals. By being able to tailor the experience to their specific requirements and preferences, clients can feel a greater connection to the process.
  • Communication: enabling the robo-adviser to communicate clearly, regularly and proactively with their clients can help to ensure that the client feels engaged and invested emotionally in the investment process. Using clear language, providing frequent updates and in a reassuring tone can all help to enable a sense of connection.
  • For some, robo-adviser interaction may be easier to engage with: not all people prefer to deal with a human, and some might find it easier to be honest about their investment preferences, their goals and future plans with a robo-adviser. Enabling your robo-adviser to ask the same questions a human might will ensure that this vital information is still collected and used.

The benefits of considering the role of emotions in building relationships with clients

In terms of helping clients reach their investment goals through designing portfolios and making astute investment decisions, the value of advice is tangible. But as we have seen, not all value is tangible to clients – rather, some value is perceived, such as emotional and time value. So what benefits can this perceived value provide to advisers and their relationships with their clients?

Building a transparent and trusting relationship: Connecting with clients on an emotional level can lead to a strong sense of rapport and understanding. This in turn can enable a greater degree of trust between the client and their adviser, so the client takes on board their advice and recommendations.

Creating an investment plan more aligned with the client’s goals: An emotional connection can enhance communication, enabling your client to feel more comfortable expressing their thoughts, goals or concerns so, as an adviser, you can provide the most effective recommendations and plans which are more aligned with your client’s plans.

Creating loyalty and a long-term client: A client who connects on an emotional level with you is more likely to trust you and therefore remain with you for the long term. Loyalty can bring the additional benefits of advocacy and referrals, which can benefit business growth.

Leveraging the emotional value of advice

Advisers can provide value to their clients in many different ways, and emotional value, whilst hard to measure, has an important role to play in the adviser/client relationship. Focusing on providing emotional value to clients, whether they are human-advised or robo-advised, will strengthen your bond with clients, enabling you to provide more personalised investment advice aligned to their goals, and enabling a trusting, long-term and loyal relationship.

Key takeaways

  • Knowing that their financial plan is continuously monitored and updated is one of the most valued emotional attributes of working with an adviser.

  • Don’t underestimate the importance of behavioural coaching, which may be the most valuable emotional service you provide.

  • Consider the differences between what clients seek from human- and robo-led advice interventions.

Considering the role of emotions can help build transparent and trusting relationships, created investment plans more aligned with client goals and instil greater client loyalty.

Source: Vanguard, 1st of January 2024.

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