Bull markets, as the adage goes, “climb the wall of worry.” That has never been more applicable than during the 95 per cent+ move the market has experienced since the March 2009 lows. Clients who listened to their advisors, overcame their fears, and remained invested have experienced rewarding gains. Diversified portfolios are finally at or even through breakeven point, and clients are breathing a sigh of relief. They’re also starting to consider what they should do now that they have survived a near-death experience. 

Right now, advisors need to worry. The reason: many clients may be looking to leave their current advisor and simultaneously make ill-considered investment decisions that can and should be avoided.

Life is not fair

Top advisors provide value by successfully advising their clients against making behavioral miscues at market extremes. Selling or panicking at the market lows and failing to rebalance at market tops are the classic mistakes advisors can help prevent. For advisors, the current risk is that clients may now be eager to sell and part company because they are finally back to breakeven. Now that a client’s portfolio is not down, the thinking goes, it’s time to bail out because the advisor’s failed strategy is what got clients into trouble in the first place. But wait a second. Wasn’t it an advisor who prevented a client from selling at the bottom? The client’s what-have-you-done-for-me-lately attitude is simply not fair.

In fact, the client’s tax consequences and physiological hurdles of selling at breakeven are negligible. As a result, advisors need to emphasize that this “easy” decision can be just as big of an error as running scared and liquidating at market extremes.

A high cost

Advisors live in constant fear of losing one of their big clients. The cost of losing a top client is exacerbated by the 80/20 rule of sales. If you do the math, one client lost can reduce production by at least 16 per cent.  Seems like a good reason to worry.

Retention and growth strategy

But worrying won’t prevent lost revenue. Advisors need to address potential client defections with a proactive and innovative approach. What is that? In short, it’s owning up to previous shortcomings. Most notably, too many advisors put clients in illiquid investments, and they and the money managers they selected took too much risk in client portfolios. To retain clients still smarting from those decisions, communicating what went wrong and what has changed may be the surest way to keep unhappy clients (click here).

The good news is that the same forthright approach can be applied to attract new clients. Everyone knows that something went terribly awry during the financial crisis. Acknowledging the lessons learned is what every good professional does to improve his or her game. This more open and human style is likely to resonate with younger wealth creators, who don’t appreciate the value of advisors, or discount their value entirely (click here).  Moreover, if advisors communicate their improved approach to "GenXers" and "GenYers" through social media – blogs, Facebook, Twitter, among others platforms – that sends a powerful and innovative message about how you do business in the post-meltdown world.

The lady doth protest

The big wirehouses are worried, too. You might not know that from interviews and speeches, such as the recent one in which Sallie Krawcheck said very few Merrill Lynch brokers have left to go independent, as reported by Investment News. But repeated proclamations from these types of firms about the independent channel remind me of the line from Hamlet, “The lady doth protest too much, methinks.”

Domino effect

While advisors should worry about losing their clients and the disproportionate impact it will have on their businesses, wirehouse management constantly worries about losing their largest clients too: their advisors. The recent article on the travails of law firms in The Economist shows how vulnerable services firms are when they lose their top talent (click here). The wirehouses and large captive wealth managers face the same challenge: when the top advisors start to leave, it can sink the entire ship.

Ironically, the unconflicted independent wealth management business model may provide the best solution for clients, as well as advisors. 

Jeff Spears is CEO of Sanctuary Wealth Services, and a champion of the independent wealth advisory industry. www.sanctuaryws.com