Hiring a Financial Advisor? Honesty Counts (With Yourself, Too)

Ivanna Hampton: Some people go the professional route to improve their financial outlook, and it may surprise them that something else is fueling that need to get help with their money. Morningstar researchers have investigated why people hire financial advisors, and it turns out their feelings play a role. Morningstar, Inc.’s Behavioral Scientist, Dr. Danielle Labotka, and Morningstar, Inc.’s Behavioral Researcher, Sam Lamas, are joining the podcast.

How Many People in the U.S. Work With Financial Advisors?

So, let’s start with a look at how many people in the U.S. work with their financial advisors. Sam, what are the numbers?

Samantha Lamas: Yes. So, in the U.S., about a third of Americans report working with a financial advisor. In our sample for this study, about 20% of participants were working with a financial advisor.

Hampton: Danielle, how did that break down by race and gender?

Dr. Danielle Labotka: When we look at gender, what we saw is that more women than men reported having a financial advisor, and that came out to roughly a third of women and a quarter of men. And then, when we look at race, what we saw is that about a third of white investors reported having an advisor, but a quarter of nonwhite investors reported having one. And that kind of maps onto what we expect based on previous research on the topic as well.

Financial Need and Financial Advisors

Hampton: So, you guys’ research found that it’s more than a financial need that sometimes drive people or motivate them to hire a financial advisor. Sam, talk about that.

Lamas: To be clear, people did report going to a financial advisor to handle a specific financial need, but it wasn’t the only reason, and it was definitely not the most prominent reason either. The other reasons that people reported going or hiring a financial advisor had to do with their discomfort handling financial issues on their own, their need for behavioral coaching, and just the quality of relationship that they had with the advisor. So, if you’ll notice, a lot of these top reasons actually have to do with emotions, not so much finances, which is kind of surprising.

Most Common Reasons for Hiring a Financial Advisor

Hampton: What were the most common reasons that people told you guys about?

Lamas: The most common emotional reasons had to do with a person’s discomfort handling financial issues on their own. Navigating financial decisions is tough. And despite all the research you can do online, all those pages you can read, you still might not feel comfortable making that final decision. And that’s when a lot of investors go to a financial advisor, for example. Behavioral coaching was actually a pretty popular one. With all the craziness of the market, all that volatility, sometimes people just want someone to help them weather the storm.

Hampton: Danielle, how can an investor kick off a conversation with their advisor and tell them about their feelings?

Labotka: I would say the good news is that you don’t have to really prepare any kind of line for your advisor if you’re really nervous about this. When advisors start working with new clients, they tend to have a set of questions that they like to ask to kind of get people to start thinking about these things and talking about these things. And so, really your advisor, when you meet with them, should be guiding you. But I will say that it is kind of hard to talk about your emotions with strangers and for some people just in general. So, it doesn’t hurt to be prepared a little bit. I think that one of the things you can do before you meet with a financial advisor for the first time is just ask yourself, “Why do I want a financial advisor?” And especially if your answer is something like, “Well, I have this particular financial issue I want resolved,” I encourage you to dig a little deeper with yourself. It’s time for some honesty with yourself and say, “Well, why do I want help with it?” Is it that this issue is really confusing to me, and I don’t really understand what’s going on? Is it—it’s really complicated, and I’m not sure if I know all of the moving parts? Or maybe you feel like, “Hey, I know what I want to do, but I kind of want the reassurance of somebody who is a financial expert to say,’Yep, what you’re doing is fine.’ " And I think that taking that chance to be honest with yourself before you go in can also prepare you to be honest with that potential stranger that you’re talking to who wants to know about your money and your feelings and all the other uncomfortable things.

Behavioral Coaching

Hampton: That’s some good advice: Check in with yourself before you open yourself up to a stranger, as you said. So, behavioral coaching, Sam, you mentioned this is one of those emotional reasons. And then, Danielle, you talked about having that honest conversation before going in. If you’re talking to an advisor, what are the things they should not say that could turn someone off?

Labotka: Behavioral coaching is really important, but you do want maybe like a good framing for it to really understand why as an investor you might want that. We’ve done some previous work that looks at different ways that behavioral coaching can be phrased, and things like talking about being somebody who is not in control of their emotions or not feeling in control of their emotions is something that maybe financial advisors shouldn’t talk about. And I think that there’s a very simple reason for this, which is that, I think most people want to have a good self-image. They want to have a good narrative about themselves and telling yourself, “Hey, yeah, I’m somebody who really struggles with control when I’m feeling scared” is probably not something that most people want to think or hear about themselves. But something that is easier for investors to swallow is hearing, “Well, it’s OK to get help with common behavioral mistakes that people make.” And I think that that’s, again, it’s easier to tell that story when it’s, “Well, I’m not alone in struggling with this. A lot of people struggle with this, and it’s OK to get help.”

Hampton: Sam, can you talk about what are some steps people can take to maintain a healthy and productive relationship with their advisor?

Lamas: I think this conversation is really about the role of emotions in financial planning and in financial decisions more broadly. So, having those frank conversations, for example, where someone is honest with themselves, the fact that they need emotional support from their advisor. At least for the individual investor, it’s about not being afraid to ask more of your advisor. I think a lot of investors have this idea that an advisor is just there to create a plan or a portfolio and then just walk away. And our data shows that that’s not exactly true. Advisors bring a lot more to the table than just stock tips and things like that. So, not being afraid of asking that of your financial advisor, and if you’re not getting that from your financial advisor, not being afraid to go look elsewhere, too.

What If It’s Not a Match?

Hampton: And what would be like a signal that maybe this relationship is not going to work, like early on, like if you’re interviewing someone, you’re like, “Oh, we didn’t kind of mesh?”

Lamas: I would say if they’re overly focused on returns or if they’re just trying to get the conversation over with or if they’re so focused on the finance aspect.

What Should You Ask Yourself Before Hiring an Advisor?

Hampton: Danielle, what should people ask themselves if they’re considering having a personal or a financial advisor work with them?

Labotka: Yeah. I would say, ask yourself what you need, not just on that financial level, though that’s important, too, but also on that emotional level when you think about money. I mean, money is something that a lot of people don’t like to talk about or even think about sometimes because it can elicit very strong emotional reactions. But if you’re thinking that you want to work with a financial advisor or you want to get your finances better in order, I think it’s time to lean into those kind of uncomfortable feelings as opposed to pushing them away. And we know from previous research that actually one of the great value-adds that financial advisors have come from that behavioral coaching. It really is an opportunity to work with somebody who can help you make better decisions for the long term to help you get toward those financial goals that you have. But it doesn’t hurt to take a moment first and, again, be honest with yourself, because it’s going to help you build that relationship that is so important to making a successful advisor-client relationship work.

Hampton: Thank you, Sam and Danielle, for providing insight into the financial and emotional reasons why people seek out a financial advisor.

Labotka: Thank you for having us.

Lamas: Yeah. Thanks for having us on.

Hampton: Thanks for checking out Investing Insights this week. Thanks to Craft Editor & Cinematographer David Ettinger; Video Producer Daryl Lannert; and Senior Video Producer Jake Vankersen. Subscribe to Morningstar’s YouTube channel to see new videos from our team. And you can hear market trends and analyst insights from Morningstar on your Alexa devices. Say “Play Morningstar.”

I’m Ivanna Hampton, your host and a senior multimedia editor here at Morningstar. Take care.

Read about topics from this episode.

Why Do Investors Hire Their Financial Advisor?

Why Advisors Shouldn’t Worry About Losing Trust During Market Volatility

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