Morally Competent Financial Advisors Deliver Superior Portfolio Performance
May 17, 2007
MINNEAPOLIS - In a breakthrough study that may define a new era in the financial services industry, researchers found that advisors who demonstrated high levels of moral and emotional competency outperformed the S&P 500 by 73% over four full years from 2001-2004. Top advisors delivered an average return on investment of 24.7% during the timeframe, nearly doubling the S&P 500 at 14.3%.
The study revealed that six key behavioral competencies accounted for 70% of the variance in client portfolio performance. Integrity had the strongest impact on positive client returns, while Client Service Orientation, Concern for Order & Quality, Teamwork, Self-Confidence and Achievement Orientation also predicted increased returns.
The study was conducted by the Consortium for Research on Emotional Intelligence with guidance from consortium member, the Lennick Aberman Group, a performance enhancement consulting firm.
In an effort to find new ways to increase client returns and improve advisor performance, the study was commissioned by Ameriprise Financial Services with the cooperation of a sample group of advisors.
“Many professionals who work with organizations speak freely to the benefits of being morally and emotionally competent, often without the research to back it up. We now have hard data that we can use to support this assertion,” said Dr. Rick Aberman, Ph.D. in Psychology and a founding partner of the Lennick Aberman Group.
“Studies show that moral and emotional competence has twice the impact on performance as talent and skill combined,” said Chuck Wachendorfer, COO of the Lennick Aberman Group with 17 years of experience as an executive in the financial services industry.
Researchers conducted interviews with advisors and systematically coded transcripts for evidence of specific competencies. Each interview yielded an average of 70 codable incidents that were evidence of an advisor displaying a specific competency.
Integrity was defined as advisors acting consistently with what they said was important. In other words, they “walked the talk”. They communicated intentions, ideas and feelings in an open and direct manner, and welcomed openness and honesty, even in difficult discussions with clients.
“After several attempts to convince a client not to abandon their financial plan, an advisor recommends that the client seek advice from another advisor because the advisor cannot, in good conscience, help the client implement a plan they believe puts the client at significant financial risk for a comfortable retirement. In this way the advisor was willing to give up a lucrative client in order not to compromise his/her principles, demonstrating a high level of integrity,” said researcher Dr. Rob Emmerling, Consortium for Research on Emotional Intelligence.
The results of this study indicate that moral and emotional competencies can not only be identified, but also developed and improved over time. Further implications of this work may apply to recruiting and talent selection of financial advisors.
Additional Details & Notes
Researchers chose 22 financial advisors, who managed baby-boomer portfolios worth between $100,000 and $500,000 over a four-year period at Ameriprise Financial Services, to be subjects in a project designed to measure the effect of advisors’ moral and emotional competencies on their clients’ portfolio performances. The project was conducted by the Consortium for Research on Emotional Intelligence, guided by the Lennick Aberman Group, commissioned by Ameriprise Financial Services and carried out by two researchers from Competency International and three certified interviewers.
The advisor-selection process began with an analysis of client-portfolio returns for assets managed continuously over four full years from 2001-2004. Researchers specified that advisors must have a minimum of 30 clients with between $100,000 and $500,000 of investible assets. The key variable in the study was the percentage of client portfolios classified in the top 25th percentile of returns.
The interview protocol used in this research was based on Behavioral Event Interviewing (BEI) (see Boyatzis, 1982); a flexible protocol with a well-established research base which supports its reliability and validity. BEI methodology is especially well-suited to identifying the individual characteristics which differentiate superior performers from typical performers in a given role.
The superior advisors delivered a mean percentage return per year of 5.6% compounded over the specified four-year period, compared to a mean percentage return per year of 3.4% by the S&P Index over the same time period.
When a competency was demonstrated, researchers not only recorded the frequency, but also assigned a level to the competency. The levels were based on complexity and degree of influence. A partial regression coefficient was calculated for each competency.
Definition of Client Service Orientation: Implies a desire to help or serve clients, to meet their needs, focusing one’s efforts on discovering and meeting the client’s needs.
EXAMPLE: The advisor helps a couple to articulate their unspoken feelings and thoughts related to estate planning. Through a series of probing questions the advisor demonstrates to the clients that what they want to have happen to their estate is not reflected in their current plans. The advisor gives the client specific advice and follows up on their request to help them find an estate-planning attorney. The advisor continues to work in collaboration with the clients, their new attorney and their accountant to better understand and serve the needs of the clients regarding estate planning.
Definition of Concern for Quality and Order: Reflects an underlying drive to reduce uncertainty in the surrounding environment. It is expressed in such forms as monitoring and checking work or information, insisting on clarity of roles and plans.
EXAMPLE: The advisor designs and implements a system to help monitor client portfolio performance on a weekly basis. Maintains detailed records of all client contacts (i.e. e-mail, phone conversations, in-person meetings) in the form of a computer database that the advisor can easily access.
Behavioral Advice training designed to develop and improve moral and emotional competencies will significantly benefit clients, advisors and financial services firms.
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