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As Cynical Investors Switch Advisers, Competition Intensifies

Advisers Relearn Importance of Client Service

NEW YORK - After the terrible performance of markets last year, disgruntled investors of all sizes are considering switching financial advisers to someone else, even if their own adviser buffered their portfolio so that it lost less than the market's overall 38% decline.

While advisers may not be able to keep all their clients, experts say a renewed focus on customer service can help advisers secure their top clients and even capitalize on the huge opportunity for capturing new clients.

"I can't stress enough the importance of client service," said Michael Bonevento, a private wealth adviser at Ameriprise Financial Services, at the Money Management Institute's 2009 Fall Conference here last month. "I almost get too much support from my broker/dealer."

Investors hire financial advisers for the same reason they hire an accountant to do their taxes or a mechanic to rotate their tires: It seems way too complicated to do it themselves.

Clients are happy as long as the adviser does a good job and is there when they need him or her, but the horrendous performance of actively managed funds in 2008 caused a serious breach of confidence.

"In June 2008, the market had its worst June in history," said Ira Millman, managing director of advisery and brokerage services at UBS Wealth Management. "For the first time ever, balanced funds fell 30%."

Because the bear market was so broad and so different from anything they had seen in the past, most advisers had no idea what to do or what to tell their clients. Some advised clients to stay the course as markets continued to plummet month after month, some advisers did whatever their clients wanted even though it was clearly a mistake, and some advisers simply stopped returning calls.

"Investors who had placed their trust in the investment industry are cross, cautious and confused," said Clarence Hahn, co-leader of the financial services practice at AlixPartners. "And while the collective loss of wealth in the past year has had a deep impact psychologically as well as financially, the irony is that the lost wealth can only be rebuilt through participation in the markets."

"Clearly, people are scared right now, and scared people don't make rational decisions," Bonevento said. "The average investor grossly underperforms markets and does not achieve their goals. People have shut down to financial professionals because they expected them to do the impossible."

Even experienced money managers didn't foresee the extent of the damage and stayed invested for way too long, betting on a rebound that didn't come for six months.

"I was shocked and disappointed to see that so many managers remained fully invested throughout the downturn," Millman said. He said smart managers went into cash as soon as they could read the writing on the wall.

Managers who underperformed their benchmarks were replaced with passive indexes, he said. Even though his portfolio took every dollar out of four different managers, he still never heard a word from them, Millman said.

"The No. 1 reason people leave their adviser is service, not performance," Bonevento said.

Often it's the little details that make a difference, such as whether the adviser or the investor calls first, and how easy it is for the investor to reach their adviser during normal times and in crises.

Advisers promise they'll be reachable during a crisis, but often that's impossible if everyone is calling at once. Investors can understand this, at first, but when an adviser doesn't return their calls for several days or longer, it can be downright frustrating.

"We see our clients four times a year and call them once a month," Bonevento said. "We always try to call them back within 24 hours."

"Our philosophy is that every member of our team should know every client," Millman said. "When they call us, everyone knows who they are. It makes a very big difference. Even though these are wealthy people, that kind of service doesn't happen at their bank or at their attorney's office."

Stiff Competition

As investors contemplate switching advisers, competition has skyrocketed for the billions of dollars of assets potentially changing hands.

"So much is in motion right now that competition is at an extreme," said Matthew Schiffman, head of retail for the Americas at Legg Mason. "We are telling our people that this is probably the best opportunity in a generation for client acquisition."

Investors should think carefully about choosing a new adviser, but the trauma of last year's market will motivate many to just go somewhere else, preferably to a name they know and can trust.

"Everything depends on reputation," said John Daly, a professor at the University of Texas. "A brand is a trust statement. The ultimate goal in a crisis is protecting the brand. Once you blow that trust, you can never get it back."