The benefits of working with a financial advisor are well documented — at a minimum, the relationship can help investors become less stressed and more optimistic about their financial situation. Despite this fact, however, only about 35 percent of all Americans work with a financial advisor.
A new Morningstar report looked into the reasons why investors choose their advisors and what advisors should do when courting new clients. “The U.S. numbers demonstrate that there are a number of people who would benefit from working with a financial planner but do not yet do so, and this points to the importance of understanding what factors compel people to hire an advisor in the first place,” authors Sam Lamas and Danielle Labotka wrote in the report.
The report pulled data from three surveys conducted in 2021 and 2022, in which Morningstar asked investors whether they worked with an advisor and what had led to their decision to hire one. Of the 3,003 people who took part in the survey, 623 indicated that they currently worked with an advisor, and Morningstar found that three in five prospective clients have an emotional driver that pushed them to speak with a financial advisor.
“The common idea out in the field, in the media, in the industry, is that people go to a financial advisor because they got a windfall, because they have a retirement account. These very logical, specific financial needs. And we did find that,” Lamas told RIA Intel. “But it was not the whole story at all. The majority of our top five were actually emotionally grounded reasons as to why one seeks financial advice.”
Four of the five most cited reasons for having hired a financial advisor were emotion-based, according to the report. These included discomfort with handling finances (32 percent of responses); behavioral coaching (17 percent); recommendations from friends or family (12 percent); and the quality of their relationship with a particular advisor (10 percent). Just one non-emotional reason — specific financial needs, such as retirement planning or loss of a spouse — made it into the top five, garnering 32 percent of the responses.
“A lot of people said things like, ‘I don’t like making financial decisions on my own. I feel more secure having a different view of my finances.’ So even though we’re constantly surrounded by all this information, people still want another person’s opinion — an expert, so to speak — to give them the confidence and security that they’re on the right path,” Lamas said.
Understanding the role that emotions play in motivating an investor to seek financial advice is extremely important, said Lamas. Advisors who are looking to court new clients need to be able to speak from the beginning of the relationship about their ability to provide both financial advice and emotional support. This includes an advisor’s website, Lamas said. “What are you putting on your website? What is the mission statement that people read?”
Advisors need to recognize that these emotions may exist, even if the clients aren’t able to express them. “We know clients are uncomfortable making financial decisions on their own, but you don’t have to point that out,” said Lamas.
Instead, Morningstar suggests that advisors lean on behavioral coaching to address some of the common emotional reasons for hiring an advisor. “Highlight the ways in which you help clients reduce decision-making anxiety, promote peace of mind, and help them reach their goals,” Lamas said.
Above all, advisors need to remember that messaging matters. The way in which advisors address or bring up emotional issues is critical, said Lamas. Morningstar’s research suggests that using colloquial language, providing clients with distinct examples, and reassuring clients that “these are issues we all face,” can help bring people on board. However, “if you tell people that they need help controlling their emotions, they’re not going to like you,” said Lamas.
