Top Challenges for Financial Advisors

Fact checked by Yarilet PerezReviewed by Anthony BattleFact checked by Yarilet PerezReviewed by Anthony Battle

Financial advisors face myriad difficulties each day. To succeed, they must combine the skills of asset managers, financial planners, psychologists, and marketers. While most advisors can wear some of these hats well, managing several roles is very difficult, especially if switching from one role to another during a single advising session.

Stephanie McCullough, founder and a financial planner at Sofia Financial in Berwyn, Pennsylvania, said many challenges advisors face come from many misunderstanding their role in financial matters. “The general public is very confused, with good reason, about what we do and who we serve. They are not aware of the many different service models that exist,” she told Investopedia. “It’s still a common assumption that someone needs millions of dollars of investable assets to get the help of a financial advisor.”

Meanwhile, many advisors are working with far less help than in the past. “We used to have a whole back office that took days to enter trades and allocate them within client accounts. Now, one advisor does the job,” said Crystal McKeon, a certified financial planner and chief compliance officer at TSA Wealth Management in Houston, Texas.

Here are some of the biggest challenges financial advisors face in their efforts to grow their business and promote their brand to the public.

Key Takeaways

• Nobody said being a financial advisor is easy work—but many challenges facing advisors have little to do with finances or investment choices.
• Clients have different goals, perceptions, and expectations for when and how their goals will be achieved.
• Different clients will want different levels and means of communication.
• Financial advisors are responsible for aggregating and translating all relevant information into actionable plans for their clients.
• Though investment portfolios only report numbers, financial advisors must balance data-driven analytics and empathetic discussions.

Managing Client Expectations

This is an area where advisors need to understand client psychology to succeed. While managing a client’s portfolio might be pretty straightforward, handling their expectations can be more complex. Many clients are unrealistic about investment returns and interest rates.

For starters, clients are often not financial professionals. They are unaware of global markets outside what headlines they see, how investments work, how macroeconomic conditions may impact certain asset classes over others, why markets may be volatile, and how long investments may take to succeed. In addition, every client has biases, preferences, fears, and expectations. Clients may perceive what they think may happen based on what has happened before.

For example, bitcoin might have increased more than tenfold from 2019 to 2021, but the asset class will continue to be volatile and may see similarly large declines.

It’s up to the financial advisor to guide them and educate their clients while providing investment advice. “For the most part, talking to clients about market volatility during actual times of market volatility is too little, too late,” David Flores Wilson, a certified financial planner at Sincerus Advisory in New York City, told Investopedia. “A better approach is to talk about likely future market volatility when they are first engaged as clients. During [periods of market volatility], we illustrate based on their risk tolerance what they could expect in terms of potential downside in the future.”

Advisors can also show their clients how value increases through investing. One way to do so is by helping clients maintain a long-term perspective in their investing so they don’t go off track with every movement in the market. Clients who can begin to see how their advisor keeps them on track will likely remain loyal to them.

“Educating clients by creating realistic expectations and planning for market drawdowns should be embedded in portfolio management,” said Neil R. Waxman, managing director of Capital Advisors in Shaker Heights, Ohio. “There is only one certainty: investment values will go up and investment values will go down.”

Staying in Touch

Advisors have more ways than ever to stay in close contact with their clients, but many don’t when things are going well. A constant flow of communication is necessary to maintain a solid relationship with most clients, regardless of what the markets are doing. Advisors can use Zoom and text messaging to keep in touch with tech-savvy clients.

Once a market heads downward, being in touch is even more essential. “During tough market times, it’s all about communication,” Alyson Claire Basso, managing principal of Hayden Wealth Management in Middleton, Massachusetts, told Investopedia. “It’s not just about whether they’re making money or not, but how well you’re keeping them in the loop.” She said that research backs up her view that clients don’t necessarily leave advisors because of losses but because of a lack of communication. “It’s crucial to stay in touch, be transparent, and manage expectations, especially when things get rocky. By being there for clients, listening to their concerns, and keeping them informed, we build trust and loyalty, even when the market is unpredictable.”

Negative news is never fun to share, but being transparent, empathetic, and supportive is a must.

Managing Information

Financial advisors always face an overwhelming flood of information. However, successful advisors understand that the key is not to react to every piece of news but to focus on client behavior and long-term strategies. Advisors must guide their clients toward reliable, time-tested sources of information to prevent misunderstandings and avoid decisions based on misinformation.

The breadth of information that advisors must manage is vast and includes the following:

1. Clients: Advisors must stay attuned to changes in their clients’ lives, goals, and financial circumstances. This awareness allows them to continually adjust and develop road maps tailored to each client’s evolving aims and needs.
2. Regulations: Staying informed about changing rules in the financial industry is critical. This knowledge is often essential for maintaining the licenses required to handle specific securities.
3. Economic trends: While macroeconomic conditions are beyond an advisor’s control, understanding global economic circumstances is crucial as they significantly impact portfolio performance. Advisors need to anticipate how worldwide shifts might affect their clients’ investments.
4. Political developments: Government actions (or inaction) can have broad financial implications for investors. Advisors must stay informed about legislation to position their clients favorably.
5. Taxes: Changes in tax policies often directly affect investment strategies. Advisors need to be vigilant about shifts in capital gains tax rates, tax brackets, credits, and the treatment of various investment types, including alternative and foreign assets, as these can significantly alter a client’s portfolio trajectory.

By effectively managing this diverse range of information, advisors can provide their clients with more valuable, timely, and comprehensive guidance.

Emotional Engagement

Many financial advisors are very analytical. Professional certifications are often data-driven and require abundant skills in quantitative reasoning.

However, many client decisions are based on emotion. Advisors need to be able to relate to their clients on an emotional level to maintain a working relationship. “Money is an extremely emotional and personal topic,” said Valerie R. Leonard, CEO and financial advisor at EverThrive Financial Group in Birmingham, Alabama. “This adds to the emotional vulnerability that clients can feel when talking about their past or present relationships with money. If clients don’t believe they can trust you to be transparent or keep their conversations and financial details confidential, they will never do business with you. It’s really that simple.”

Your engagement with clients, of course, has many forms. For instance, suppose a client’s portfolio isn’t doing well. Your engagement likely includes considering the following:

• When to tell the client
• How often to check in with the client
• How to tell the client (i.e., do they prefer blunt language or a soft landing?)
• Where to tell them (i.e., is an electronic message most appropriate?)
• Preparing for how they will likely react

Group Support

Independent financial advisors may often feel alone in their practices and have little in the way of planning support. Advisors who struggle with this can find support in organizations such as the Financial Planning Association (FPA), the National Association of Insurance and Financial Advisors, or the National Association of Personal Financial Advisors.

These groups have a wealth of resources in marketing, sales, and practice management to help make your professional life easier.

“When you’re joining a professional association, you’re looking for education, you’re looking for resources, you’re looking for peers to connect with,” said Peter Lazaroff, an Investopedia top-10 financial advisor, who noted he’s partial to the FPA, though he also belongs to other organizations.

How Do Financial Advisors Manage Client Expectations?

Managing expectations is a very socially driven, psychological issue that requires empathy, communication, and education. Clients often do not have the knowledge or expertise that their advisor has, and each client experiences different emotions about changes to their portfolio. Financial advisors must understand that their perspective is different from their clients, and bridging that gap is the responsibility of the advisor.

How Much Do Financial Advisors Make?

The median annual income nationwide for a personal financial advisor is $99,580 per year as of mid-2023, according to the last National Bureau of Labor Statistics estimate. The median hourly wage for professionals in the field at $47.88 per hour.

Which Financial Advisor Professional Association Should I Join?

Each financial advising-related association has a focus. When deciding which to join, research them to ensure they have the kinds of services and networking opportunities you’re looking for.

Lazaroff said that some associations offer free services to members that can be instrumental in your business. He mentioned that continuing education and even media training are crucial things some organizations offer that modern financial advisors can’t do without. “Join a professional association that has continuing education, other resources to support your practice’s growth or your growth, and peer networking opportunities—those are what’s crucial to me,” he said.

The Bottom Line

It’s important for advisors to understand where their clients are coming from and make them understand the value that they offer. Those who can successfully manage their clients’ expectations can improve retention and their bottom lines. The pressure to stay ahead of technological advances, maintain a competitive edge in a crowded market, and meet the increasingly sophisticated demands of clients requires advisors to be not just financial experts, but also empathetic communicators and strategic business managers.

The most critical challenge, however, lies in building and maintaining trust with clients in an era of economic uncertainty and heightened scrutiny. Successful advisors will be those who can effectively balance the technical aspects of financial management with the human elements of relationship-building and clear communication. Joining a professional association can provide additional support.

Read the original article on Investopedia.