The non-financial reasons clients hire, keep or fire financial advisors

Traditional motives like investing, security and value remain important, but emotional reasons for hiring, keeping or firing a financial advisor are also pivotal for clients, a new study found.

In an open-ended survey, more than 3,000 investors were asked to explain their grounds for entering, maintaining or leaving a relationship with an advisor. Morningstar used the answer to examine the underpinnings of a profession whose practitioners frequently describe it as a "relationship business." 

The results of the report released last month by the research, technology and asset management firm offered insight into how planning has moved beyond what the study described as "functional" services and into "human-centric" ones. The top-cited "emotional" category for hiring or retaining an advisor, "comfort handling finances," came in near the bottom of the justifications for firing them, while the most popular "financial" rationale for tapping a planner, "specific financial needs," was near or at the bottom for keeping or terminating the relationship.

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The findings suggest there has been "a fundamental shift in the industry" reflecting a "growing desire for human-centric advice" that is "good news for advisors," according to the report by Morningstar Global Head of Behavioral Finance Ryan Murphy, Senior Behavioral Scientist Samantha Lamas and Behavioral Scientist Danielle Labotka. Lamas and Labotka discussed the study in a panel at last week's Morningstar Investment Conference in Chicago.

"Text data may not be fun to work with on the research side, but it is fruitful," Lamas said. "What we saw was a pretty nuanced story that gives advisors a blueprint on how to work with clients at each of these inflection points."

Morningstar researchers sought to home in on a client's actual basis for these decisions, as opposed to putting words in their mouths or in situations that may blur their thinking because "we as humans have this desire to want to be viewed favorably," Labotka said.

"The problem with this new model is it's far less clear at different stages of the advisor-client lifecycle what clients want," she said. "We want to hear it in their own words, and we want to hear it in an anonymous format where they can say whatever they want to say."

This change in the profession "may require advisors to adapt their practices" if they're not already conversant in areas such as the "behavioral pitfalls" of investing, advice focused on long-term goals or methods of providing a "peace of mind about finances," the report said. Morningstar's study followed other research from the company tracking how much investors lose each year based on the mistaken timing of their transactions and Vanguard's often-referenced report quantifying the large impact of advisors' behavioral coaching of clients. 

READ MORE: 6 ways to implement psychology in advisory practices

Here are the most frequently cited reasons for hiring, keeping or firing an advisor, along with a sample quote from investors' responses:

Hiring
32%: Discomfort handling finances ("I feel more secure having a different view of my finances.")
32%: Specific financial need ("To see if we were on track for retirement.")
17%: Behavioral coaching ("I lack discipline to stay invested when the market is erratic.")
12%: Referrals ("They have good reviews from close family and friends.")
10%: Relationship quality ("I found an advisor who understood me and I found to be a good fit.")

Retaining  
37%: Discomfort handling finances ("Money makes me nervous.")
22%: Advice quality ("The advisor has helped me consider a variety of things…")
16%: Behavioral coaching ("A long-term perspective…")
12%: Investment returns ("He makes our tiny contribution much larger with his money magic.")
9%: Specific financial need ("As I get closer to retirement, I'll want to be even more sure…")

Firing
32%: Advice quality ("I felt that I was putting myself more at risk than I was comfortable with.")
21%: Relationship quality ("He did not care about us — only wanted our money.")
17%: Cost of service ("They were not giving us much advice and still charging us a lot of fees.")
11%: Investment returns ("The types of offerings were below to average mutual funds…")
10%: Comfort handling finances ("Preferred mostly to self-direct.")

The numbers speak to the need for frequent discussions with clients identifying their goals and tracking their progress toward them, according to Lamas and Labotka. Those talks should begin early in the relationship with an emphasis on rooting out their most meaningful aspirations and tying their financial plans to them directly, Labotka said.

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"You really need to slow your clients down when you're having those discussions about their financial goals," she said. "We as humans are really good at thinking fast, and sometimes we're too good at it. Sometimes when we have these biases, it can cause us to make mistakes, especially when it comes to talking about our goals."

Morningstar and other firms provide resources that give advisors tools such as exercises to help them guide clients in finding their goals free of distorting factors such as "social desirability bias," Lamas noted. Those, in turn, can foster more manageable purchases such as buying a house by a lake in the midwest rather than one in the Hamptons and means for advisors to more "adequately communicate your value" to the client, she said.

"You have to help clients dig out their needs and expectations, and the only way you can do that is through meaningful conversations," Lamas said. "It may seem out of place in a financial conversation, but it's really where financial planning is going. … They don't understand what advisors do. You're kind of a black box to clients, and you really have to pull back the curtain."