By Lisa Brignoni, CFA

In a survey1 of retail and institutional investors on why clients leave their financial advisors, the top reason noted was weak investment performance. In another survey2 that asks financial advisors the same question, the top response was seemingly different: failure to communicate effectively. Given the disparity in answers between advisors and clients, it does seem clear that some form of miscommunication is the root cause of this challenging situation. But is this due to actual portfolio underperformance, or a difference in expectations? The first question advisors need to answer in order to increase client retention is: how are clients determining if their portfolio is underperforming?

Underperformance as a reason for leaving is not very informative until you put yourself in your clients’ shoes. Without doing this, it would be tempting to address this problem by throwing all of your resources toward improving investment management. This is a difficult and possibly futile effort if the problem isn’t the performance itself. So what are the possibilities for performance measurement in the client’s mind?

  • Is performance being judged in relation to a well communicated and understood benchmark?
  • Is it being compared to a peer’s portfolio?
  • Is it judged against progress towards that individual’s financial goals?
  • Or is there some other unknown measure?

The next questions advisors need to ask is: when are clients developing these mental benchmarks for performance and who else is influencing them? It’s at this point that advisors can have the greatest impact in communicating achievable return expectations and thereby decrease the probability of clients leaving due to underperformance.

When a client signs on with a financial advisor, they will have some preconception of what returns they’d like to see. Thus, the natural starting point for this discussion is before they become clients. This is a tricky spot for advisors who are incentivized to be all things to their prospective clients. Ultimately, they will have to strike a fine balance between being too cautious and stretching for unrealistic returns.

Referencing the previous disparity in client and advisor perspectives, here’s another point to illustrate the delicate nuances of this conversation. A Natixis survey* noted that individual investors have return expectations of 9.5 percent over inflation, while surveyed advisors believe 5.3 percent is achievable. Bridging this gap from the start is necessary to have a successful relationship, but doing so in today’s market environment can be challenging (in our previous blog post, we discuss weaving market conversations into the financial plan discussion).

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Setting returns expectations the right way

To set the stage for this conversation let’s consider two questions:

  1. What market information do advisors have that drive their lower return expectations?
  2. How can they communicate that knowledge effectively to temper their clients’ expectations?

To start, since most client portfolios are impacted most by long-run macroeconomic trends rather than short-term stock or even sector-specific shocks, it is these trends that need to be highlighted when setting return expectations. Indicators such as U.S. stock market valuations, emerging market earnings per share, GDP measures, interest rates and employment numbers are a good starting point for developing asset class views and market themes. These views can then be extrapolated to the client’s target portfolio set during the financial planning process and used to justify return expectations.

What’s more, focusing on performance alone ignores portfolio risk, a crucial component of the financial planning and portfolio construction process. In other words, a client’s portfolio may trail a benchmark not because it actually underperformed, but because a lower level of risk is appropriate for that client. By explaining the macroeconomic trends that impact long-term investing, it is easier to discuss portfolio risk.

Deciding on a benchmark

Once you’re on the same page with your client regarding return expectations you can seamlessly move the conversation along to performance measurement. By instilling confidence in your client from the beginning, you can work together to determine a benchmark for performance that your client will understand and stick with regardless of other external references.

Performance doesn’t necessarily have to be linked to a market index or some other external reference point. Ideally it can be based on progress towards one’s financial goals. Rather than demanding the client conform to your standards for a benchmark, consider offering them different options and explaining the pros and cons of each. Structuring the conversation in this way both educates the client about performance measurement and allows them to choose what makes most sense. Fostering this kind of educated decision making in the investment process will set a strong foundation for future conversations.


Whether it be underperformance or lack of communication, what underlies all of those reasons for clients leaving is a fundamental breakdown in trust. Clients who perceive conflicting information as valid may start to lose faith in their current advisor. Those advisors that can continuously instill confidence by educating their clients on market performance can get ahead of the competition and prevent outside influences from leading their clients astray.

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