Measuring adviser value in a fee-based world

Transcription

1 Measuring adviser value in a fee-based world Executive summary One of the positive outcomes of RDR is that it has forced a meaningful conversation about what constitutes value for clients. It s increasingly clear that advisers need to communicate value to prospective clients and actively demonstrate value to existing clients. Authors Julie Littlechild, Adviser Impact. This report will reveal the newly created Value Index, a measure of industry performance in delivering value to clients. It is designed to provide a snapshot of the industry s success in delivering value to clients and, perhaps more importantly, to help identify the underlying drivers of high value client relationships. This document is directed at investment professionals in the UK only, and should not be distributed to or relied upon by retail investors. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments

2 A question of value Clients who perceive high value not only feel a greater sense of confidence and financial wellbeing; they are also more loyal, more profitable and provide more referrals. This throws up two interesting questions, however: 1. How do advisers know if they are delivering value; and 2. What can they do to raise the bar? The fact is that advisers work very hard, every day, to deliver an outstanding client experience and clients have responded with high levels of satisfaction. Satisfaction, however, has not always translated into loyalty and advisers might well wonder what they should be doing differently. The Value Index and this report is designed to help advisers sift through the many things they could do in order to highlight the few things they should do to drive value and organic growth. About the research This report is brought to the industry from Vanguard Asset Management. It is based on research conducted by Adviser Impact, which involved input from 1,163 consumers across the United Kingdom in May, 13. The sample is structured to provide insight into three distinct segments, described below. This report primarily focuses on Advised clients but includes some commentary on the DIY segment toward the end of the report. See Appendix 2 for a participant profile. Figure 1. Sample breakdown Segment Percentage of respondents Description Advised Clients 65% Clients who work with an adviser to manage some or all of their financial affairs. Fully advised 31% A sub-set of Advised Clients, the Fully Advised indicated that they work with a financial adviser to manage their investments/ financial plan Hybrids 34% A sub-set of Advised Clients, the Hybrids manage their own investments/financial plan but use a financial adviser for specific services or tasks Do-It-Yourselfers (DIY) 35% Clients who manage their own investments/financial plan and do not work with a financial adviser 2

3 Measuring value Value can be defined in many ways and is, it might be argued, subjective. Perhaps the simplest and most profound definition is based on client perception of value. In order to assess perception of value received, consumers were asked three distinct questions, designed to evaluate value relative to fees, market performance and financial goals: 1. To what extent do you agree or disagree that your primary adviser adds value above and beyond investment returns/market performance? 2. How would you describe the value that you receive from your primary adviser, relative to the fees paid? 3. Thinking about your most important financial goal, how important do you consider the advice you receive from your adviser in reaching that goal? Responses to the three questions were combined into a single Value Index for the industry. By combining the three questions, we set a high bar based on a broad definition of value. Industry report card: The Value Index Assuming equal weight for each question, the Industry Value Index sits at 73 out of 1, with 1 representing maximum value. While time will provide greater context, it is safe to describe the results as relatively strong, with room for improvement. With the creation of the Value Index, and its initial result of 73 out of 1, we can monitor and track over time the industry s progress in creating and delivering value. Figure 2. The Value Index Minimum value Maximum value Figure 3. Underlying questions The Value Index is composed of the following, underlying mean scores across all Advised clients. Average score (out of 5) for all advised clients To what extent do you agree or disagree that your primary adviser adds value above and beyond investment returns/market performance (where 1 is strongly disagree and 5 is strongly agree)? 3.5 How would you describe the value that you receive from your primary adviser, relative to the fees paid (where 1 is very low and 5 is very high)? 3.5 Thinking about your most important financial goal, how important do you consider the advice you receive from your adviser in reaching that goal (where 1 is not at all important and 5 is critical)? 4. While a single number, such as 73 out of 1, provides a powerful way to represent industry performance, it is important to remember that averages don t tell the entire story. The average is composed of clients who are thrilled with the level of value received and those who are neutral or even completely unhappy. In order to provide additional context for the Value Index, and to allow for deeper analysis on the drivers of value, we categorised clients into low, moderate or high perceived value, based on how they responded to all three questions. We used a process called Principle Component Analysis to assess and categorise clients, resulting in the breakdown shown in Figure 4. See Appendix 1 for an overview of methodology. 3

4 Figure 4. Client categorisation 3. Why does it all matter? While it might seem obvious, it is important to assess the impact of high value relationships on the consumer, the adviser and the industry as a whole. Low perceived value: 33% Moderate perceived value: 26% High perceived value: 41% Why does it matter? The importance of focusing on value and of measuring our success in achieving high value can be linked to both the adviser s business and the client s peace of mind. It is a classic win-win. For the adviser, high perceived value is correlated to both loyalty and growth. For the client, high perceived value is not only strongly correlated with satisfaction but is linked to strong feelings of confidence and clarity regarding the future. When considered from this perspective, three questions emerge: 1. Is it good enough that fewer than half of clients fell into the high value category? We would suggest there is still work to be done in order to ensure that clients fully recognise and experience the value of advice. 2. What is different about the experience of those clients in the high value category? By isolating and analysing those who receive the highest value we can identify some of the core drivers of value. Advisers who are delivering high value also tend to be helping to create greater confidence and clarity with respect to reaching financial goals. We can infer that, by focusing on those activities that drive value, advisers can help to create a greater sense of financial well-being. By focusing on the activities that drive value, advisers can also expect to drive growth. High value is associated with higher loyalty, increased share of wallet and greater referral activity. Figure 5. Clients who receive high value are more confident in their financial future 1% Percentage of advised clients Low value Moderate value 5 39 High value Very confident Somewhat confident Q: How confident are you that you will reach your primary financial goal? 4

5 Figure 6. Clients who receive high value tend to have greater clarity regarding their goals for the future 1% Percentage of advised clients Low value Moderate value High value 1 Not at all clear General idea Very clear Q: Which of the following best describes how you think about your financial goals? Figure 7. Clients who receive high value are more loyal 1% Percentage of advised clients Low value Moderate value High value Somewhat likely Extremely likely Q: How likely are you to continue to use your financial adviser to manage your financial plan or portfolio in the next months? Figure 8. Clients who receive high value bring more assets to the table 1% Percentage of advised clients Low value Moderate value High value <25% <25 49% <5 74% <75%+ Q: What percentage of your investable assets are managed or influenced by your financial adviser, including cash, bonds, insurance endowment savings plans, fixed interest, shares, pension funds, National Savings, alternative investments etc.? 5

6 Figure 9. Clients who receive high value make more referrals 1% Percentage of advised clients Low value Moderate value High value Very comfortable referring Have referred Q: To what extent do you agree or disagree? I am comfortable referring my financial adviser to a friend, family member or colleague. Shows those clients rating a 5 out of 5. Q: Have you provided a referral to your financial adviser in the last 12 months? Shows those clients responding yes. Value as the core metric Value is not only connected to growth, it is also a higher standard than the traditional metrics used to assess the quality of client relationships, including satisfaction, trust or loyalty. While all are important, none set the bar as high as value as you can see in the chart below. High value, as defined in this report, is a high standard because it demands that clients think about what they are receiving relative to what they are paying, separately from investment performance and in the context of their overall financial goals. As a result, we believe that those advisers who focus on value will not only deliver an outstanding client experience, but will differentiate themselves in the marketplace and experience more significant growth. Figure 1. Top two box scores for satisfaction, loyalty, trust and value 1% Percentage of respondents High satisfaction High loyalty High trust High value 6

7 Moving the Index There is no shortage of things that an adviser can do to build deeper relationships and add value. The question is which will have the greatest impact? Which will help to drive clients from low or moderate to high perceived value? In the following section we evaluate the attributes most closely associated with high value and then we turn to the tactics that support those attributes your action plan. The fundamentals Certain adviser attributes are important to all clients, irrespective of their views on value or the way in which they choose to work with their adviser. We derived these attributes by asking clients to rate the importance of 3 different service dimensions on a scale of 1 5, with one being not at all important and 5 being critical. See Appendix 3 for a full list of attributes that were assessed. The top three attributes trustworthiness, knowledge and accuracy are the table stakes in any advisory relationship. Figure 11. Clients views of their adviser Importance (Percentage rating somewhat important or critical ) Satisfaction (Percentage rating somewhat agree or strongly agree ) All Advised Low Value Moderate Value High Value My financial adviser is trustworthy 87% 69% 92% 97% My adviser has good knowledge about investment products and services 87% 7% 92% 97% The accuracy with which my account is handled 85% 59% 84% 95% Q: To what extent are the following important to you when you think about your relationship with your financial adviser? Q: To what extent do you agree or disagree with these statements? The drivers Beyond the basics, however, our analysis went deeper on the underlying drivers of value. In order to identify the key drivers, we isolated the 41 per cent of clients who reported high value. Using regression analysis, we identified the six service dimensions that were significantly correlated with high value. Those are, in order of impact on value: 1. My adviser helps me focus on the long-term 2. My adviser provides guidance to identify the kinds of activities that will likely push clients from one value segment to the next. Note the extreme variation in satisfaction on the core (top three) drivers. We interpret the analysis as follows: advisers who actively help clients to focus on the long-term, provide meaningful guidance and build strong personal relationships will create higher levels of value and experience higher levels of growth. 3. I have a strong personal relationship with my adviser Figure 12. Drivers of value 4. My statements are clear and easy to understand Low Value Moderate Value High Value 5. My adviser has good knowledge about investment products and services My adviser helps me focus on the long-term 43% 8% 92% 6. My adviser helps select investments with the best chance of a high return While investment-focused dimensions are significant, the top three factors focus on advice and the relationship. The drivers of value help us My adviser provides guidance I have a strong personal relationship with my adviser 35% 59% 78% 51% 89% 94% 7

8 Adviser action plan The attributes identified as most important to clients and those identified as drivers of value are, necessarily, high level service dimensions. In order to drive value, advisers must seek to create strong satisfaction on each of the core attributes. To help advisers focus on the actions that can contribute to value, the study also examined a series of more tactical aspects of the adviser/client relationship. Those actions fall into three key categories: Define, Communicate and Measure. Figure 13. Action Define value Communicate value Measure value Adviser action plan Tactics Position yourself as the trusted adviser, at the centre of your clients network of advisers Craft a holistic offer that is built around a financial plan that spans generations Lay a strong service foundation with clearly articulated service standards Create a service agreement that outlines what clients can expect Reinforce credentials and expertise as part of your positioning Gather client feedback, consistently Define value There are two distinct components associated with defining value. The first the offer focuses on structuring an offer that reflects those things that support a focus on the long-term and guidance, while putting the adviser in the role of trusted adviser. 1. Provide clients with a clear plan to reach their goals Clients who perceive high value are more likely to have a written financial plan and ascribe more value to the plan. Percentage of advised clients responding yes Figure 14. 6% Existence of written financial plan 28 Low value 46 Moderate value 54 High value Q: Do you have a written financial plan which may include insurance, tax planning, retirement planning, estate planning, or some combination of these items? Figure 15. Value of written financial plan 1% Percentage of advised clients Low value Moderate value High value Plan has low value Plan has high value Plan has moderate value Q: How valuable is the written plan in helping you reach your financial goals? (n=those with a plan) 8

9 2. Consider the family Clients who perceive higher value and have children are more likely to work with an adviser who helps to manage wealth across generations. In order to execute on this tactic, consider the following: Redefine your meeting process to incorporate family update meetings that include adult children and, if appropriate, the executor for the estate. Percentage of clients responding yes Figure 16. 1% 8 6 Provision of family wealth management Help families to tackle difficult conversations about money by facilitating family discussions or simply pointing them to relevant articles or other content. Ensure that multi-generational work is not ad hoc, but rather a defined part of the value that you offer to clients. Consider how you explore this concept when you first begin working with a new client. Low value Moderate value High value Q: Does your primary adviser provide a service that helps your family with managing or transferring your wealth across generations, often referred to as family wealth management? (Shows per cent responding yes among those clients who provided a response.) Figure 17. Central role of financial adviser 3. Position yourself as the trusted adviser Put yourself at the centre of your clients professional network. Clients who perceive high value are more than twice as likely to work with an adviser who plays a central role in their lives, thinking beyond the advisory role and extending to other professionals. In order to execute on this tactic, consider the following: Draw the picture. When explaining your approach and offer, create a visual that shows you and your team at the centre, surrounded by their other professional advisers. You become the hub, the core, the trusted adviser. Clearly define how you will/can work with your clients other professional advisers (e.g. accountant) and craft standards around information sharing and communication. Build your centre of influence network in order to provide clients with referrals to other professionals who share your service philosophy. The second component of Defining value is less about what you deliver and more about how it is delivered, incorporating such things as scope of client contact, educational activity and, ultimately, tactical issues such as client segmentation, technology and workflow. My adviser plays a central role in my financial life, coordinating or working with my other professional advisers The above sample is limited to clients who indicate they work with other professional advisers. Low Value Moderate Value We know that clients place the highest value on client reviews, compared to other methods of communication such as newsletters, written market commentary etc. Not surprisingly, then, clients who perceive higher value say they met more frequently with their adviser in the last 12 months. When putting your client contact plan into action, consider the following: 1. Segment clients based on their current and future value to the business (assets, revenue, time invested, influence, growth potential etc.). 2. Structure contact levels to reflect the value of the client. 3. Examine both capacity to deliver and client profitability prior to finalising any client contact plan High Value 3% 41% 55% 9

10 Figure 18. Frequency of adviser meetings Thinking about the last 12 months only, how often did you actually meet with your adviser (either face-to-face or by telephone) to review your financial plan or portfolio? Low Value Moderate Value High Value Once 27% 19% 16% Twice 22% 35% 26% Three times 15% 18% 17% Four times 6% 1% % Five or more times 4% 9% 18% I did not meet with my adviser in the last 12 months 26% 9% 4% Communicate value A great plan to deliver value can still fail if it is ineffectively communicated to clients. Without clear communication regarding service standards, clients may not fully appreciate all that they receive. 1. Communicate service standards If advisers are going to differentiate themselves on the basis of the range of services they provide and the depth of relationships they develop, that must be communicated. While roughly 8 per cent of clients say their adviser has outlined the range of services and products, only 22 per cent say that this was formally communicated in writing, ranging from 14 per cent for Low Value to 3 per cent for those clients who receive the highest value. When implementing a plan to communicate service standards, consider the following: Formal communication of the range and level of services is linked to perceived value. For that reason, advisers should consider documenting and reviewing this information with clients, both during the on-boarding process and at least annually from that point onward. There are three types of documents to consider: A Service Agreement outlines the key aspects of the relationship and may include: Scope and frequency of plan/portfolio reviews Range of services provided Service standards Team roles/contact information Overview of client educational opportunities Percentage of clients responding yes Figure 19. 6% No Awareness of products and services 14 Yes, informally Yes, written agreement Low value Moderate value High value Q: Has your adviser outlined the range/scope of products and services that he/she is able to offer (e.g. financial planning, insurance)? Summary of team professional/continuing education commitments Use of client feedback in the business Expectations of the client A Team Profile provides an in-depth overview of each team member, outlining roles and responsibilities, credentials, background etc. A Process Overview can give a client a visual snapshot of the planning process (e.g. discovery, implementation, monitoring) to highlight the time and value of each part of the process

11 2. Reinforce expertise The data shows clearly that adviser knowledge is a critical driver of value and such knowledge is often reflected in the credentials that he/she holds. Those credentials tell clients that you have earned the right to provide them with trusted advice. The vast majority (83 per cent) of clients say they have some awareness of the adviser s industry credentials or designations, although fewer than half say they were specifically discussed. While there is no direct connection between communicating designations and value, advisers will likely need to consider how they are establishing and communicating their competence in order to help prospective clients make the best choices and to reassure existing clients that they are getting the best possible advice. When reinforcing your expertise, consider the following: While a relatively high percentage of advisers are moving to gain industry credentials and designations as a means of driving real value, they are not always effectively communicated or understood. You might consider: Creating an overview which explains your designations in layman s terms; Providing prospects with a checklist of what they may want to ask prospective advisers (including you) and include a question on designations; and Keeping clients informed of continuing education activities. For example, rather than setting a standard out of office message when you are taking courses, add information on a course you are attending and the benefits to your clients. Figure. Communication of credentials Has your adviser communicated his or her industry credentials or designations (e.g. Certified Financial Planner)? Yes, I have seen this information on his/her card, website or other materials but we have not discussed 36% Yes, my adviser has discussed his or her credentials with me 46% No, there has been no communication around credentials 13% I don t know 5% 3. Be proactive on issues affecting clients Proactive communication extends to include those things that affect a client s financial life and might include such things as industry updates (e.g. RDR) and fees. It is clear that advisers who have proactively communicated on the issue of RDR and have had open conversations with their clients about fees are more likely to be perceived as providing high value. By being proactive on these issues and unapologetically discussing fees and value, some advisers have successfully reinforced that value. Given the relative importance of fees in assessing value, it is interesting to note that client understanding of fees remains relatively low, especially among investors that perceive low value from their adviser. There is strong evidence that many clients do not understand how they pay their adviser, or how much they pay. This is, perhaps, Percentage of clients Figure 21. 6% I have had no communication regarding fees Communication of charging model We have discussed fees, but not in-depth We have discussed fees in detail Low value Moderate value High value Q: Which of the following best describes how your financial adviser has communicated how he or she charges for the advice provided?

12 not surprising given that 24 per cent of clients say they have had no communication regarding fees and another 34 per cent say they have had some (but not a great deal) of communication on the subject. This lack of communication translates into an understandable lack of knowledge for clients. Low Value clients are more likely to indicate that they don t know how much they pay in fees. Nearly half of clients in the low value segment do not know how much they paid their adviser in fees. There is also work to be done to educate clients on the structure of their fees, with 36 per cent of clients saying they will pay commissions or a combination of fees and commissions in 13. Percentage of clients responding I don t know Figure 22. 6% Unawareness of charges Low value Moderate value High value Q: How much did you pay your primary financial adviser in fees, commission or other forms of compensation in the last 12 months? Shows percentage responding I don t know. On a related note, investors understanding of RDR itself remains patchy. In 11, over half of clients said they were not familiar with the RDR and/or regulatory changes associated with the RDR. That number has dropped to 28 per cent in 13. Of the 72 per cent of clients who have, at a minimum, heard of the RDR, less than a third felt they had a good understanding of the changes. Those clients working with an adviser were more likely to be aware of the changes. Percentage of advised clients Figure 23. % Perceived charging method Of those clients who are aware of the RDR, they are equally likely to have heard about the changes from the media as they are from their advisers. Fees only (calculated as a percentage of assets) Fees only (not linked tof assets) Commissions only A combination of fees and commissions Other I don t know Q: To the best of your knowledge, how will your financial adviser charge for his/her services in 13? Figure 24. Awareness of RDR 6% Percentage of respondents Yes, I ve heard something about it 33 Yes, I have a good understanding of the changes 28 No, I m not familiar with the changes 12 Q: Are you familiar with recent regulatory changes (Retail Distribution Review) that will impact an adviser s ability to charge commissions?

13 When communicating regarding regulatory change or fees, consider the following: Provide clients with clear information on regulatory changes, in layman s terms, and ensure that they understand how and how much they pay. Link the payment to the value that you provide so that fees are associated with the full range of services you offer. Give clients the opportunity to tell you how they would define strong value or their definition of a successful relationship and come back to that regularly to ensure you are delivering. Percentage of respondents Figure 25. 8% Through media How clients heard about RDR From my adviser 11 From family and friends Q: How did you hear about these regulatory changes? (n=those who are aware of changes) Measure value The Value Index is, ultimately, about measuring performance in delivering value. However, every adviser needs to understand how he or she is performing in delivering value, as defined by his or her clients. In The Vanguard/Adviser Impact white paper entitled Defining and Articulating Your Value, you ll find information on how you can integrate client feedback into your business. We know that there is a connection between value and client feedback, as Figure 26 shows. When structuring a process to gather feedback, consider the following: Percentage of clients responding yes Figure 26. 6% Low value Clients asked for feedback 43 Moderate value 55 High value There are a variety of ways to gather feedback and your choice should ultimately be based on your objectives. At the highest level, your choice is between qualitative and quantitative feedback. While not mutually exclusive, your immediate concerns will drive your initial choice. Consider the following options: Qualitative feedback. If your goal is to gather strategic input, such as a review of a new product or service, an assessment of your advertising or an evaluation of your pricing, then qualitative feedback is best. You should consider a client focus group, personal interviews or using your client advisory board. Client Advisory Boards. Typically made up of 8-1 clients, advisory boards often meet two to four times a year to discuss issues related to your business. Your board should consist of Q: Has your financial adviser ever asked you for feedback on the service that he or she provides? committed clients who recognise that their interests are best served by helping you improve. Board members usually serve for a defined term (two years, for instance), which allows you to tap into fresh thinking and also recognises that your clients do not have unlimited time. Focus Groups. Such groups are usually run on a one-off basis, rather than representing an on-going discussion. The sessions are typically issue-specific, such as the usefulness of your firm s web site. You can run the group in your office or at a professional focus group facility. For both focus groups and client advisory boards we strongly suggest you consider using a professional facilitator. 13

14 Quantitative feedback. If you goal is to gather quantitative feedback on such things as satisfaction, expectations and needs, then a written survey, to all of your clients, is the best option. Telephone interviews can also be considered a quantitative approach, although it may be harder for clients to provide thoughtful responses to survey questions by telephone. Written/Online survey. This more quantitative approach typically involves either a hard copy survey or on-line survey. The survey is sent to all clients every months, creating a benchmark for the business that is tracked over time. The methodologies above are not mutually exclusive. For example, many advisers create a firm benchmark using an annual written survey. The results of that survey are then used as the basis for a deeper discussion with advisory board members. The Hybrid segment The data generated through the study makes a compelling case for focusing on the drivers of value in client relationships. Further analysis also suggests an important connection between the perception of value and the scope of advice being received. Those clients who are fully advised are more likely to be experiencing the benefits of a high value relationship, as compared to hybrid clients (defined as those that receive advice in some areas but do it themselves in others). This may not be surprising in that Hybrid clients only use advisers for specific tasks, primarily managing pension funds (see Figure 27). While some Hybrid clients feel they get strong value from their adviser (despite working with them on a limited basis), the high value group is skewed to the Fully Advised. Figure 27. Financial topics on which advice was sought 1% Pensions Estate planning Tax planning Mortgages/ Lending Comprehensive Financial Planning Personal insurance Cash management 3 Other None of the above Q: Do you use or access professional advice of any kind to help with you any of the following? (Per cent responding yes.) Figure 28. Breakdown of High Value group Low Value 33% Moderate Value 26% High Value 41% Fully Advised: 6% Hybrid % 14

15 The differences between the two groups can be seen by examining their responses on the three value questions that comprise the Value Index. Figure 29. Underlying questions: Fully Advised vs. Hybrid Fully Advised Hybrid To what extent do you agree or disagree that your primary adviser adds value above and beyond investment returns/market performance? (Shows somewhat/strongly agree) 67% 52% How would you describe the value that you receive from your primary adviser, relative to the fees paid? (Shows high/very high) 63% 44% Thinking about your most important financial goal, how important do you consider the advice you receive from your adviser in reaching that goal? (Shows somewhat important/critical) 85% 71% Using the same Value Index scoring, the ratings would be as follows: Figure 3. Value Index: Fully Advised vs. Hybrid Minimum value Maximum value Hybrid Fully advised The data suggests that while some Hybrids perceive strong value from the adviser they use for specific aspects of their financial lives, they are more jaded with respect to the value of advice. The greatest discrepancy is connected to value relative to fees, which suggests that this is where advisers need to focus in their messaging if they want to win back this group. Figure 31. Drivers of value: Fully Advised vs. Hybrid Percentage providing a top two box rating Fully Advised Hybrid My adviser helps me focus on the long-term 84% 69% My adviser provides guidance 69% 54% I have a strong personal relationship with my adviser 87% 73% 15

16 It is, perhaps, not surprising that those clients who have opted out of full advice ascribe less value to full advice. However, it is important to note that while Hybrids may ascribe less value to advice, they also feel less confident about their financial future and less prepared to meet a number of future financial challenges. This trend is also both apparent and more pronounced among DIY investors. The DIY segment will be discussed in greater detail later in this report; however, key data points are provided here as a point of contrast. Figure 32. Confidence in reaching financial goals 6% Percentage of respondents Fully advised Hybrid DIY Q: How confident are you that you will reach your primary financial goal? Shows percentage who are very confident Overall confidence is likely connected to how prepared clients feel to deal with their most pressing financial concerns. Whatever the segment, clients tend to place roughly the same importance on a variety of financial objectives. The top two concerns or worries for all Advised clients are: Maintaining sufficient assets to meet lifetime income needs (42% very concerned) Ensuring my partner/spouse is taken care of should I pass away first (36% very concerned) These are followed, albeit with a significant lag, by three concerns with the same rating of 27% very concerned: Coping with a significant market downturn Leaving a financial legacy for my children Dealing with the rising costs of health/longterm care However, there is a significant difference in how prepared clients feel with respect to managing against these key challenges. Figure 33. Percentage of respondents who feel fully prepared for the future Fully Advised Hybrid DIY Maintaining sufficient assets to meet lifetime income needs 36% 24% 19% Ensuring my partner/spouse is taken care of should I pass away first 36% 35% 25% Coping with a significant market downturn 21% 15% 8% Leaving a financial legacy for my children 25% 24% 16% Dealing with the rising costs of health/long-term care 24% 14% 9% 16

17 This data highlights a clear opportunity for advisers in that it demonstrates that a lower percentage of clients who are not working with an adviser feel prepared to deal with future financial challenges. The very drivers of value focusing on the longterm and providing guidance are the things that will likely have a positive impact on these groups. Defining the opportunity It would be simplistic, at best, to suggest that all Hybrid and all DIY investors represent an opportunity for advisers going forward. In the following section we focus attention on those groups which represent an opportunity based on both assets and motivation to change. To begin, we can get a sense of the potential among the different segments by categorising each segment based on investable assets reported in the study. Figure 34 shows the breakdown. The red numbers denote the targets that many advisers have identified as the best sources of growth. They are the Hybrid and DIY segments with some or significant wealth. However, a client is not necessarily a target if there is no motivation to move. For that reason, we have identified three specific target groups for advisers in Figure 35. Figure 34. Perceived sources of growth Smaller investors: low assets < 1, Emerging affluent: mid assets 1, 499, Affluent: high assets 5,+ DIY 27% 63% 1% Hybrid 16% 66% 18% Fully advised 11% 68% 21% Figure 35. Target groups for advisers Target Group Description Proportion Advised Target Hybrid Target DIY Target Fully advised clients who are emerging affluent or affluent and who are in the low value segment. Hybrid clients who are emerging affluent or affluent and who are in the low value segment. DIY clients who are emerging affluent or affluent and low on confidence in meeting their financial goals % of all Fully Advised clients 33% of all Hybrid clients 9% of all DIY clients 17

18 On this basis, the Hybrids clearly represent the greatest opportunity for advisers; however there is opportunity across the board. Of those in the Advised Target category, 27 per cent are likely to change advisers in the next 12 months. Of those in the Hybrid Target category, 51 per cent are likely to change advisers in that same time period. The extent to which advisers will be able to tap into the opportunity represented above starts with a focus on value. The key concerns of these target groups can be addressed with a singular focus on the core drivers of high value and a strategy to define value and aggressively communicate that to the marketplace. The message of value is particularly important as high fees tends to be the primary reason that clients choose to manage some or all of their own investments. However, it s not just fees that make investors go it alone. Significant numbers of Hybrid and DIY clients believe that they can generate better returns on their own. This familiar behavioural bias reveals another opportunity for advisers to add value: by helping clients to avoid common pitfalls such as over-confidence, fund collecting and market-timing. Figure 36. Primary reasons for not seeking advice 1% High fees for advisers Better return on investments myself Insufficient assets Privacy of information 7 5 No investment advice from bank 9 4 Not aware of other options Other 4 None of the above Hybrid DIY Q: What are your primary reasons for having chosen to manage some or all of your own investments/financial plan? (Percentage responding yes.) The impact of RDR There is no doubt that the RDR has created some disruption and movement. The reality is that the shift has been both toward advice and away from advice so there is both risk and opportunity for advisers. We have estimated the shift toward and from advice for each market segment. About 17 per cent of clients who are fully advised today, say they were previously DIY or Hybrid. Further, about 1 per cent of clients who are Hybrid or DIY today, say they were fully advised previously. If the current assumptions being used by many businesses namely that the best opportunities exist among Affluent and Emerging Affluent clients - are sustained, it seems likely that investors with relatively modest assets will increasingly be orphaned and will have to do it themselves. This has potentially wide-ranging implications for the whole industry, not to mention wider society. Some advisers will challenge the accepted focus on the Affluent and Emerging Affluent segments and try to find ways of serving smaller investors cost effectively. If they don t, someone else probably will. 18

19 Summary We believe that value is becoming an increasing focus for investors and that, as this trend continues, clients, advisers and the industry as a whole will benefit. Value sets a high bar. Providing value is the right thing to do for clients, who benefit from a higher standard of service; for advisers, who experience stronger growth; and for the industry, which will experience greater stability if clients continue to invest with confidence. We will track the Value Index over time to provide on-going insight into performance. As a starting point, however, perceived change in value provides some insight into whether value has increased, decreased or stayed the same since RDR became fact. Seventeen per cent of all advised clients say that the value they have received relative to fees has increased over the last 12 months. There is little doubt that much of the confusion and concern surrounding the RDR has settled down. For good or bad, the process focused the industry on the critical importance of delivering value to clients. It is clear that while the industry s focus on RDR will fade, the focus on value will not. The goal of this report is to provide a simple but powerful metric to measure value now and into the future. In doing so, it can provide a focus and filter for the activities that seem to compete for our attention every day. Embedded in the concept of measurement is the ability to assess what drives change. And the research points us clearly towards a definition of value that focuses on emotional outcomes such as trust, confidence and clarity. Ultimately, however, those high level concepts need to be driven down to a set of activities that will create a strong foundation to deliver value. Percentage of advised clients Figure 37. 1% Yes, higher Changes in perceived adviser value Yes, lower No, stayed the same Q: Has the value you receive from your adviser, relative to the fees you pay, changed over the last 12 months? 1. DEFINE value by structuring an offer that looks beyond the individual client to provide a holistic vision across generations and by clearly defining a meaningful client experience. 2. COMMUNICATE value by documenting and reinforcing your client commitment. 3. MEASURE value by consistently gathering and analysing client feedback. These action items provide a tactical filter for the more strategic findings of the study. And, perhaps more importantly, they are also designed to help you create a foundation to successfully tap the opportunities that continue to exist across the three key segments: Fully Advised, Hybrids and DIY. Opportunity always accompanies change. And while the change is, hopefully, behind us, the opportunity persists

20 How can Vanguard help? For further information on how to demonstrate the value you provide, please refer to the following Vanguard materials: Vanguard s principles for investing success a white paper describing in detail why it s important to tie your value proposition to the things you can control Building a successful fee-based advice practice a comprehensive guide to thriving, not just surviving, in a post-commission world Vanguard Learning module on building a robust investment advice process CPD-accredited training on creating an advice process that adds value for your clients see vanguardlearning.co.uk For further information on low-cost investing with Vanguard, please see: The Case For Indexing our latest research showing why index fund investing can be the most efficient solution for many investors Our index fund range brochure featuring details on how we select benchmarks, our indexing expertise and information on our funds and ETFs LifeStrategy funds our range of regularly rebalanced target-weight funds, designed for a range of risk appetites and a great way to meet the needs of lower net worth clients Alternatively, take advantage of one of our regular workshops and webinars speak to your Vanguard contact on for a full schedule.

21 About Adviser Impact Adviser Impact is a leading provider of research and client engagement programmes for the financial services industry in North America and the United Kingdom. As a recognised thought leader on client engagement, their tools for financial advisers combine client feedback and relevant content to help build deeper client relationships and increase referrals. The company is built on a foundation of industry experience and fact-based research, and draws on the insights gathered from tens of thousands of investors every year. They have helped to shape the way in which financial advisers manage and grow their businesses and have been recognised as a key Influencer in practice management by Financial Planning Magazine. For more information visit or info@adviserimpact.com Appendix 1: Methodology The following provides a step-by-step overview of the Value Index analysis process. 1. In the first step we assessed client perception of the value they are receiving from their adviser. We asked clients three different questions (value relative to fees, market performance and achieving goals). They provided a rating of 1 5 on each of these dimensions. We expressed the averages as a rating out of In order to understand what is driving the highest value, we split clients into three groups based on their responses to the value questions. We named these groups low, moderate and high value. For example, clients in the high value category were more likely to provide a high rating on all three questions, which were equally weighted. (PCA Principal Component Analysis was used for this step.) 3. We isolated the clients who reported receiving high value and ran a regression analysis to identify the service dimensions most closely correlated with being high value. We identified six and included the top three in the model. 4. We believe that, by delivering on the three things that clients say are most important (Stated Importance) and the three things that were identified as having the strongest influence on high value (Derived Importance), advisers can push more clients into the high value category. 21

22 Appendix 2: Participant profile The Economics of Loyalty: UK was conducted via on-line survey in May, 13, utilising recognised investor panels. 1,163 participants completed a survey. The margin of error is +\- 2.9 percent. This report highlights the 76 clients who work with an adviser in some capacity. Respondents were filtered to ensure that all worked with a financial adviser and made/contributed to the financial decisions in the household. A defined number of participants were identified for the asset levels identified. The asset levels were determined based on an assessment of more than 1, surveys returned to Adviser Impact, as part of its Client Audit programme 1, to reflect the typical distribution of clients working with advisers today. Figure 38. Investable assets of respondents 1% 8 Percentage of respondents < 1, 1, 249,999 25, 499,999 5,+ Q: What is the total value of your investable assets, excluding any property you own? (Include cash, bonds, insurance endowment savings plans, fixed interest, shares, pension funds, National Savings, alternative investments etc.) Figure 39. Age breakdown of respondents 1% 8 Percentage of respondents < Q: In what year were you born (compute age)? Figure. Gender breakdown of respondents Percentage of respondents 1% 8 6 Q: Are you.(male/female)? 59 Male 41 Female 22 1 Adviser Impact conducts client feedback programmes for financial advisers.

23 Appendix 3: Full list of service attributes Adviser Impact assessed the following service dimensions in the study. The dimensions that are most important to clients and those that drive value emerged from this list, based on the analysis. 1. Keeps me on track/focused on the long term 2. Helps select the investments with the best chance of a high return 3. Acts as a sounding board/helps me make difficult decisions 4. Helps me deal with the ups and downs of the market 5. Creates a long-term plan to meet my financial goals 23. My adviser clearly explains difficult financial concepts 24. My adviser has good knowledge about investment products and services 25. My adviser puts the needs of me and my family first, when making recommendations regarding our plan or portfolio 26. My financial adviser is trustworthy 27. My adviser has my interests at heart 28. I have a strong personal relationship with my adviser 29. My financial adviser treats me with respect 3. My adviser finds ways (such as a client social event or gifts) to thank me for my business 6. Helps me define my financial goals and objectives 7. My adviser provides guidance 8. My adviser provides reassurance 9. My adviser helps me focus on the long term 1. My adviser helps me make difficult decisions 11. My adviser educates me about issues that may impact my financial future 12. My adviser engages me in difficult conversations about my financial future 13. My adviser is proactive in managing our relationship 14. My calls and s are returned promptly 15. The frequency with which my adviser contacts me meets my needs 16. My financial adviser makes few if any errors on my account 17. I have online access to my account information 18. My statements are clear and easy to understand 19. I am confident in the skills of my adviser s support team / assistant. Any problems I encounter are resolved quickly 21. My adviser always follows through on his or her promises 22. My adviser fully understands my goals for the future 23

24 Connect with Vanguard > vanguard.co.uk > Adviser support > This document is directed at investment professionals in the UK only, and should not be distributed to or relied upon by retail investors. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments. Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. 13 Vanguard Asset Management, Limited. All rights reserved. VAM