Managing Your Client's Expectations

by Mike Best

While it is extremely important to manage your client's expectations in the financial services industry, it is also important in other industries as well.

In the highly competitive financial services industry, it is extremely important to provide a quality service at a reasonable price. However, it is equally important to "manage your client's expectations" in order to develop and maintain a lasting relationship. If you don't manage your client's expectations and they do become dissatisfied with the service and leave you, it becomes a waste of their time, as well as yours.

During my twenty-five years in the wealth management business, I have en-countered many clients with totally un-realistic expectations of the investment returns that can be earned in the financial markets. Unrealistic expectations, that result from a lack of knowledge or an isolated event, must be dealt with or risk it becoming the reason a good client leaves you for the competition. In other words, not dealing with a client's unrealistic expectations is a recipe for failure.

Modern Portfolio Theory (MPT) originated with an academic paper written in 1952 by Harry Markowitz, titled Portfolio Selection. Markowitz (winner of the 1990 Nobel Laureate in Economics) hypothesized that by applying mathematical probabilities one could quantify a portfolio's risk and return prospects and find the optimum (efficient frontier) allocation of stocks, bonds and cash for a desired level of risk. Professors Brinson, Hood and Beebower, who analyzed the returns of U.S. pension funds from 1974 to 1983, further advanced MPT when their analysis determined that over 90% of a diversified portfolio's return was the result of strategic asset allocation. They found that security section and market timing accounted for less than 7% of a diversified portfolio's long-term return. However, many investors do not find the process of objective setting and asset allocation compelling enough to warrant their attention. Often times our initial conversation with this type of client is centered on the details of our work, rather than the big picture. In my mind, these clients will "never see the forest for the trees" unless we are successful in slowing them down sufficiently to work through the investment process as defined by the academics.

If we are successful in working with our clients to properly identify the investment objectives and strategic asset allocation for their portfolio, then we can predict with some degree of certainty an approximate return their investment portfolio will realize over time. Once the expected return is discussed with the client, it establishes a baseline expectation to measure our performance against. If we find the client desires a higher return, or "more bang for their buck", we understand that the investment objectives must be revisited and the asset allocation must be adjusted to include more exposure to stocks, and less exposure to bonds.

While it is extremely important to manage your client's expectations in the financial services industry, it is also important in other industries as well. Often times, managing your client's expectations is nothing more than not "overselling", or telling the truth during the sales process and following through with a consistent message during the delivery of the product or service.

For example, my car recently needed major repair work on the transmission, so I took the car to my trusted auto mechanic. Not wanting to be without a car, I was hopeful to get the work done the same day. However, my mechanic explained to me the extent of the work involved in fixing the transmission, and the need to order parts to complete the job. He estimated that it would take three days to complete the work. Although it was not what I wanted to hear, I was accepting of the conversation and then very pleasantly surprised when I learned my car was ready in two days. Certainly, the auto mechanic managed my expectations, made me happy and kept me as a satisfied client.

Managing your client's expectations does not ensure a lasting relationship with them, nor does it eliminate the need to do the detailed work necessary to deliver the product or services promised. However, it does provide the foundation upon which a long-lasting and profitable relationship can be built.

Mike Best is the President of Gold Trust Company. He may be reached at 913-323-7762 or by e-mail at mikebest@goldbanc.com.