While some industry statistics emphasize that a large portion of investors end up firing their financial advisor, especially inheritors, a recent Morningstar survey found it’s a rare occurrence, with just 6%, or 184 of the 3,003 investors surveyed, having terminated a relationship with an advisor. Still, Morningstar stated it’s important for advisors to understand the motivations behind firing decisions.
Morningstar asked this group of 184 investors the open-ended question of, “Why did you choose to stop working with [an] advisor?” After analyzing the data and putting their answers into six categories, the research firm found the top reason for firing an advisor was related to the quality of the advice and services, at 32% of responses. That could mean the client didn’t perceive the advice and services to be helping them achieve their financial goals.
The quality of the relationship was the next most common reason, at 21% of responses. For these responses, investors indicated they didn’t have a good relationship with the advisor due to a number of reasons, such as mismatch in values, not having trust in the advisor, or not having a good rapport, Morningstar stated.
The cost of services was the third most common reason for firing, at 17%, followed by return-driven performance reasons, at 11%, and their comfort handling financial issues on their own, at 10%. The quality of communication was cited by 9% of respondents.
“The quality of financial advice and services was most frequently cited as the reason for firing a financial advisor, but the quality of the relationship and cost also appeared more often than many of the other categories,” Morningstar stated in the report. “This suggests that although there are recurring themes for why advisors are fired, assumptions as to why investors fire their advisor may be overly focused on returns.”
Morningstar found that those with higher incomes, more investable assets and higher level of financial literacy were more likely to have terminated an advisor in the past. In addition, the difference in the average age between those who have and those who have not fired an advisor was statistically significant, meaning older investors were more likely to have fired someone in the past. There was no difference between genders.
In the report, the research firm also gives suggestions for how advisors can address the top reasons advisors are getting fired. For instance, the top two reasons, quality of advice and services and quality of the relationship, can be addressed by emphasizing the relationship. That may include having a conversation with clients about the best interest standard, using discussion guides to understand clients’ deeper goals in the onboarding process, and conducting goal-setting exercises with clients.
The issues around cost of services, discomfort handling financial issues, and quality of communication can be addressed by communicating the value that an advisor brings, such as helping clients better understand services, reaching out to them proactively and using different communications channels.
Regarding performance issues, Morningstar suggested advisors set expectations early, and emphasize the value of long-term investing.