Why Clients Fire Their Financial Advisors (2024)

Financial advisors get fired all the time. It can sting when it happens to you, but understanding why you were dumped will help you succeed.

Studies show that most advisors aren't fired over market losses. Important relationship factors are often more crucial to keeping a client within your firm over the long term.

As financial advisors, it's crucial to understand why clients terminate their relationships with us. By examining these factors, we can improve our services and build stronger, more enduring connections with our clients, even when there's little you could have done to keep that client.

A 2023 Morningstar study found that about 6% of investors had previously fired their advisors, and these people tended to be older, more affluent, and have more investing experience and knowledge. Based on this and other studies, we review below the most often cited reasons clients seek new advisors, what you can take away from this data, and how to strengthen your relationships with clients as you grow your practice. As we detail these, you can see that while the expressed reasons might change, a lack of communication between clients and advisors is at the heart of each situation.

Financial Advisor Performance

Kalen Holliday, director of marketing and communications at Interactive Advisors, a service that matches investors and financial advisors, said she hears from dissatisfied financial advisory clients all the time—mostly right after they fired their advisor."We hear it all," she said. "People complain about opening an account and then never hearing from the advisor, or feeling like they were overlooked for 'only' having $500,000 in investment funds." As financial advisors, it's crucial to understand why clients terminate their relationships—and never make any of them feel like any aren't important to you.

In the 2023 Morningstar report, almost a third of surveyed investors who had fired their advisors cited the quality of financial advice and services as the primary reason.

However, it's essential not to confuse "quality of financial advice and services" with numerical portfolio gains and losses since "unhappiness with returns" was reported by only 11% of those surveyed.

Rita Gunther McGrath, a professor at Columbia Business School, knows a thing or two about numbers.When she didn't like the numbers she was seeing in her statements, shefired her advisor.

"It was really all about poor performance," McGrath said. "I was with them for seven years and ended up with less money than I had sent to them. Honestly, I'd have been better off leaving it sitting in a bank account." But poor performance is often part of a bigger picture of a relationship breaking down.

What the Data Shows

Another set of researchers looked into data from the 2007 to 2009 financial crisis to better understand how losses affect advisory relationships. This period was chosen because losses were widespread, making it easier to isolate the impact of portfolio performance on client retention.

Contrary to expectations, the researchers found that a decrease in net worth was not the primary factor driving clients to seek new advisors. Instead, increases in income played a greater role in these decisions. The authors concluded that while individuals enter a financial advising relationship for "purely financial matters, developing a good rapport is integral to the sustainability of the relationship." This aligns with other studies on the matter.

A standard claim made about the American electorate is that it votes for the party in power when the economy is up and votes against it when it heads down—no matter the likely responsibility of the party's policies or not. Financial advising clients, at least, don't show such a compunction. As long as a communicative advisor prepares them, they can put any losses in the broader context, knowing having no gains might be impressive in a recessionary period. That said, the context should be able to explain the poor returns, not simply be an excuse for them. And should the stock market be on the rise, you'll need to explain the reasons for less-than-stellar returns to your client.

The researchers also looked at other studies and presented conclusions that were widespread among those who have studied client-financial advisor relationships. They found that "financial advisors can educate their clients by providing meaningful updates essential during down markets." However, the role of the financial advisor goes beyond simply providing information. The authors noted, "Financial advisors are often the voice of reason for their clients. They prevent clients from making irrational financial decisions and hold them accountable during the implementation phase of the financial planning process."

Implications

The fear of losing clients during a recession is understandable, but the study found that "clients do not fire their financial advisor because they experience a decline in net worth during recessionary periods." They suggest the key to maintaining client relationships lies in understanding the impact of demographics (less wealthy, younger) and psychological characteristics (the less risk averse, less investment knowledge) that align with a higher propensity to fire an advisor after losses. By doing so, "the financial advisor will have the ability to identify those clients who are more likely to end their engagement during periods of high market volatility." Once these clients are identified, the authors recommend that "an advisor should take steps to build their client's trust and confidence in the relationship."

Thus, while clients may later attribute their decision to leave an advisor to portfolio losses, a more accurate assessment would suggest that losses and insufficient communication to manage expectations during market downturns are more likely the underlying reasons.

Absence of Quality Communication

Experts in the field point to a lack of communication as a primary reason investors part ways with their financial advisors. Bill Hammer, Jr., a principal founder of the Hammer Wealth Group in Melville, New York, told us, "Clients don't necessarily fire advisors only because of poor performance, but rather because the advisor never communicates with them."

When advisors fail to maintain regular contact, clients may conclude that their advisor is "asleep at the wheel," as Hammer put it. This perception can be particularly damaging during market downturns or other challenging periods when clients most need reassurance and guidance.

Hammer stresses the importance of advisors communicating with their clients during these inevitable disappointing periods. He said that some financial advisors struggle with having difficult conversations, which can exacerbate the problem and lead to a breakdown in the advisor-client relationship.

Jason Laux, owner and retirement advisor at Synergy Financial Group in Pittsburgh, agreed that a lack of good communication is a big reason clients walk away. "Clients can tolerate the ups and downs of the market, changing economic whirlwinds, and anerratic interest rate environment if, and only if, they feel that their advisor is monitoring the situation and keeping them informed,"he said.

Laux added that nobody wants to be in the dark about their money, especially in troubling times. "Just knowing a plan is in place and that they are being cared for will provide thereassurance needed to maintain and build a strong working financial relationship," he said.

Advisors must regularly contact their clients to prevent communication breakdowns. This includes providing timely updates on portfolio performance, discussing market conditions and risks, and addressing any concerns or questions they have. By maintaining open lines of communication and demonstrating a commitment to keeping clients informed, advisors can build trust and strengthen their relationships, even during challenging times.

Lack of Personalization

Most financial advisors work hard to tailor their approach to each client and maintain open communication despite the job's administrative demands, especially during challenging periods. Failing to do so can make clients feel like their advisor is misreading them.

McGrath said her advisor didn't understand her needs. "I'd go to these meetings with them, and it was all pie charts and mumbo-jumbo about portfolio diversification, investment horizons, and technical stuff."

However, the ultimate cause of McGrath's dissatisfaction was her advisor's lack of communication, particularly during periods of poor performance. "After years of losses, do you think they would call me and have a conversation?" she asked. "No, it was radio silence for years."

When McGrath finally terminated the relationship and transferred her account, citing poor performance, her advisor's response still misread her. "The response was, 'but your husband's account did well …' instead of acknowledging the underperformance in my account and being forthright about it," she said.

Unrealistic Expectations

Gregory Gallo, co-founder of the Opus Group in Red Bank, New Jersey, said advisors who get fired are often guilty of overselling at the outset. "Overpromise and under-deliver—that's a big one."

"In my 16 years in the business, I have heard many advisors in an effort to win business make statements to prospective clients that ultimately prove too good to be true."Too often, financial advisors suggest they'll outperform the "market,"setting the client up for disappointment. "When a client feels like they have paid good money for that underperformance, they simply leave," Gallo said.

Other investment experts agreed, adding that setting unrealistic expectations is another result of poor communication from an advisor."Promising investors returns that are way above market, and then not delivering on them, is a surefire way to lose clients," Hammer said.

High Fees

As investors have become more educated about the impact of fees on their long-term returns, they are increasingly seeking out the lower-cost alternatives that have become available. The rise of robo-advisors and other digital wealth management platforms has made it easier than ever for investors to access professional financial advice at a fraction of the cost of traditional advisors. These services often charge a percentage of assets under management significantly lower than the industry average, ranging from 0.50% to 2% or more.

Leading robo-advisors like Betterment and Wealthfront charge annual management fees of just 0.25% to 0.40%, depending on the level of service and account balance. These lower fees can translate into substantial savings over time, particularly for investors with larger portfolios.

Of course, robo-advisors are not the only option for investors seeking lower fees. Some traditional advisors have also begun to offer lower-cost services, such as flat-fee or hourly billing, in response to growing demand from cost-conscious clients.

Ultimately, the key for advisors is to be transparent about their fees and demonstrate the value they provide for those costs. An advisor providing decent returns will be less questioned about fees than when those fees are a significant part of a client's returns. By discussing the benefits of their services and how they align with clients' goals, advisors can help justify their fees and build trust with their clients. As Holliday told us, when clients get high returns, high fees won't make them wince. When they're not, they look to cut costs. Firing an advisor who isn't providing what was promised is an obvious choice.

The Bottom Line

As a financial advisor, it takes hard work to attract clients and even more work to keep them. Clients can part ways with their advisors due to poor communication, mismatched expectations, underperformance, lack of personalized advice, trust issues, high fees, and inadequate financial education.

Advisors can maintain good client relationships by enhancing communication, aligning expectations, providing personalized services, maintaining trust, ensuring fee transparency, and offering continuous financial education.