President's Letter - What Does an Advisor Need to Know?


While Spectrem often discusses how important it is for financial advisors to provide a holistic discussion of an investor’s financial picture, the bottom line is that investments are still the foundation of most relationships. Knowledge of investments is therefore critical when investors are selecting an investment advisor. But what exactly do investment professionals need to know to satisfy the demands of investors?

In our recent report, Preferred Sales Approach: Capturing the Wealthy Investor, more than 1,000 investors were asked the traits required when they were choosing a financial advisor. Investors were asked to rate several traits on a 0-100 scale with 0 being “does not matter at all” and 100 being “matters a great deal”. The trait rated as the most important was "professionalism", which scored a 78.04. Second was "technical investment knowledge", rated at 75.34. "Technical investment knowledge" scored higher than "fees" (75.04) and "services offered" (73.33). “Advisor is a fiduciary” scored a 69.62.

How did investors define "technical investment knowledge"? Two-thirds indicated that an advisor “needs to be able to answer all of my investment questions”. Similarly, 60 percent felt that an advisor “needs to know more than I do”. Finally, 55 percent indicated that a financial advisor “needs to know about a variety of investments”. Older investors were more concerned about an advisor being knowledgable about a variety of investments while younger investors simply want to make sure that the advisor knows more than they do. This may be a tall order since many younger investors are relatively confident regarding their own investment knowledge - whether or not that confidence is deserved. Remember that younger investors are more likely to research a topic on the internet than older investors so their perceived level of knowledge is often greater than knowledge based upon experience.


So what do advisors need to know? More than three-quarters of investors expect their advisor to have greater knowledge than they do regarding equities, and a similar percentage (72%) expect their advisor to have knowledge of fixed income. Slightly more than half of investors want their advisor to be familiar with fixed/variable annuities and almost half demand knowledge of short-term/cash investments. Forty-seven percent want their financial advisor to be familiar with alternative investments, but only a quarter expect expertise in real estate. 

There were some slight differences based upon age and level of wealth, but responses were generally consistent regardless of segment.

Overall, investment expertise is the basis of the financial advisory relationship. When asked to rank the Top 5 aspects an investor might be looking for when choosing a financial advisor, 37 percent of investors identified “expertise” as the most important trait. A quarter of investors chose “ethical” as the most important trait. Yet while expertise is critical, it needs to be surrounded by a number of other important traits. These include “making me trust him or her”, as well as “showing genuine concern about me and my finances”. An easy-to-use website is also part of the overall selection criteria.

Therefore, most financial advisors should feel fairly confident if their expertise in equities and fixed income is strong. Demonstrating expertise should be an important part of any client or prospect meeting. Just remember that the level of expertise is defined differently by each customer or potential customer. As investors continue to increase their own level of expertise, so must an advisor increase his or her own expertise.