One’s reputation can be compared to a tomato. As lovely as it looks otherwise, if it’s got a blemish of rot on it, nobody wants it anymore.
It’s not like a financial advisor has to have bodies buried in their backyard either. Online reputation is a particularly insidious thing that’s sensitive to even the slightest non-positive comment made about a financial advisor, or anyone else for that matter. If negative online commentary is not managed promptly, it has a tendency to spread and get out of control very fast because it’s so easy to copy, spread, distort and amplify negative comments that are left online (and negative comments and news tend to spread faster than positive ones).
If you think about it, sites like Facebook and Twitter are little more than bragging and gossip forums where the same people who used to spread rumours in high school tend to congregate (it’s no coincidence that the Dementoid in Chief, Donald Trump, loves to use Twitter). This is particularly bad news for investment and realty advisors because they stake their business on maintaining a good long-term professional reputation in a highly commoditized and competitive field and because they deal with something that people care about almost as much as they do their health, namely their investments and their wealth.
Imagine you are a retail investor who, for some reason, has decided to find a new investment advisor (perhaps you have moved to a new city or have decided that your current investment advisor is not as skilled and responsive as you’d like). You might ask someone you know and trust if they know a good advisor, but you probably would just start searching online to find two or three good candidates. You plunk the two advisors’ names into good ol’ Google and you discover that both have similar backgrounds, work for equally prestigious investment dealers, speak your native tongue, etc. But then you see a link to a website with comments about one of the advisors that is concerning. You read the investor’s opinion that the advisor was not so responsive or proactive, that they put them into risky investments that performed poorly and, most damning of all, that they exhibited some kind of eccentric behaviour. Like most people, you are not likely to become a client of such an advisor (and if you already are a client of theirs who was already having second thoughts, you might start looking for a new one soon).
If the president of the United States can be elected largely on the basis of fake news, it’s easy to imagine that even a fake negative comment about an investment advisor can have a massive detrimental impact on their career. What matters most is the nature of the opinion, though, not so much whether that opinion is necessarily correct. Jilted lovers, unreasonable former clients or even unscrupulous other advisors who would like to damage an advisor can all leave exaggerated or outright incorrect damaging comments about a financial or realty advisor online (remember, psychologists tell us that the incidence of sociopathy is around 3%, so there are a lot of bad investors and others in society who wouldn’t hesitate to ruin someone by posting lies about them online).
Investment advisors are generally well acquainted with the concept of risk management in the context of managing investments for their clients. But too often they are unaware of the major risk posed to their own finances by a stray bad comment left in any corner of the Internet that Google and others can serve up to any prospect, client, employer, or business partner.
The 3% incidence of sociopathy is perhaps a good proxy for the risk/probability that the average financial advisor or realtor will eventually become the victim of abusive and damaging online commentary made about them (This risk rises, of course, if the advisor is below average and actually not a good advisor).Using this figure, then, let’s roughly calculate the financial damage to a full-service investment advisor’s business of receiving bad reviews online.
Assumptions and reasoning:
- Annual average client churn of 10% – source: McKinsey & Co / PriceMetrix report on advisor churn and retention). Note that clients who leave are mostly unhappy; these are the most likely people to leave bad online comments.
- Average AUM per investment advisor of about $100 million across the 10 largest investment dealers in Canada (source: Advisor’s Edge 2016).
- Average 1% annual fee revenue at a grid retention rate of 50% (advisor keeps 50 basis points).
The mathematical logic then becomes:
The probability of a bad review popping up in any given year of 3% x 10% churn x $100 million x 0.50% + alpha (where alpha, estimated at 5%, is the chance in any year that the advisor will do something wrong that will lead to negative comments online (e.g., lose temper with a client, break a compliance rule, unknowingly or not, forget to do something for a client)).
(3% x 10% x $100,000,000 x 0.50%) + (5% x 10% x $100,000,000 x 0.50%)
= $1,500 + $2,500
= $4,000
This dollar figure represents the average amount per year that the average financial advisor should be spending on online reputation management, even if no negative content about them has appeared yet online. The amount that should be spent to manage an already bad online reputation is likely substantially higher.
The future cost of losing clients due to bad reputation online
There is an opportunity cost of future clients not won plus the opportunity cost of lost revenue from clients who leave (on a net basis). Let’s conservatively peg that as double the average annual churn rate of 10%, multiplied by the starting size of the average book (Assets Under Management) of $100 million, as stated previously.
The simplified math for this is:
2 x 10% x $100 million x 0.50% = $100,000 income lost per year, for every year that the bad online reputation is not corrected (more difficult as time goes by without it being managed properly).
A poor reputation online can cut your investment advisory business by more than half! At Devon Ryderwood, we’ve seen it happen and it’s not pretty. Clients see those festering online comments and they leave. New ones don’t sign up. Advisors have lost their homes and cars over a few bad comments left about them online.
So pay an expert to monitor, improve and manage your online reputation or pay a much bigger price when someone starts slagging you on the Internet.
