For the last 20 years, financial services firms have been preaching to investors about the importance of diversification.

For the last 20 years, financial services firms have been preaching to investors about the importance of diversification. So, it should come as little surprise that today’s affluent investor not only practices diversification in structuring his investment portfolio, but also in choosing to work with multiple brokerage firms.

In a recent survey of 4,000 affluent US investors (respondents were required to have at least $100,000 of investment assets, excluding real estate), Cambridge, Massachusetts-based Cogent Research, found that only 35 per cent of affluent investors have a relationship with just one brokerage firm, while an equal amount have relationships with three or more.

This lack of loyalty to a single provider suggests that many investors do not entirely trust the brokerage firms with which they are doing business. This not only means that a majority of clients are at risk to being lured away by a rival, but it also sheds light on the larger issue of brokerage profitability.

The data tells us that the average US brokerage firm is only likely maximising the profit potential of one in three client relationships, as there is typically far less profit that can be earned when client assets are spread across multiple brokerage firms. And, as leading brokerages increasingly focus on high net worth investors, the issue is being exacerbated.

The tendency to work with multiple brokerage firms rises among wealthier investors, with nearly half (44 per cent) of investors with more than $2 million working with three or more brokerage providers. This means that brokerage firms’ preferred clients, those with the most money, are the least loyal.

Since the early 2000s, leading brokerage firms have been adopting policies designed to raise the focus of their advisor forces from the merely affluent to high net worth investors. These policies include the shifting of low-balance clientele into automated call centres, so that the advisor with whom they had a relationship is free to spend more time working with his “best” customers (as measured by the amount of assets in their account).

At one US brokerage provider the minimum balance a client must have to speak with an advisor has reportedly risen from $100,000 approximately one year ago, to $200,000 today. While this practice may help advisors capture greater share of wallet from wealthier clients, it also threatens to weaken the firm’s position with its most loyal customers, many of whom have lost the ability to speak with their trusted advisor.

So what can brokerage firms do to increase loyalty among existing clients? In analysing the underlying drivers of investors’ satisfaction and loyalty to brokerages, Cogent found that while the leading driver of satisfaction is recent investment performance, the leading driver of loyalty is fees and expenses on investments. High fees were also cited as a leading cause of brokerage termination among investors that had left one firm for another within the last five years.

On the surface, this might suggest that low-fee self-service-oriented brokerage providers have a distinct competitive advantage over their full-service competitors, but this is not true. By analysing loyalty at specific brokerage platforms, Cogent found that many full-service brokerage firms generate stronger loyalty than do low-cost self-service platforms.

It is not, therefore, the actual fees and expenses being charged that drive investor loyalty, but the perception of the value they receive in return for those fees that creates loyal, or disloyal, clients.

Rather than simply altering client service models in an effort to increase face-time between advisors and wealthy clients, brokerage marketers must also do a better job of communicating the depth and breadth of the services they offer. Without an understanding of all that’s being offered, the client may perceive a lack of value – a condition, that if not rectified will, in most cases, lead the client to search for a new brokerage provider.

Furthermore, executives at brokerage firms with captive advisor forces must also face the fact that they have two sets of clients that must be kept loyal – the investor and the advisor. And, while investor loyalty is vitally important, the loyalty of the advisor to a firm that he represents is even more so. Within our survey, Cogent asked each of the respondents that use a financial advisor (64 per cent of the total) to rate the likelihood they would follow their advisor to a new brokerage firm if he moved.

To the likely dismay of brokerage executives, only 8 per cent of respondents say they would definitely stay with their current brokerage firm, meanwhile 26 per cent said they would definitely follow their advisor, and another 41 per cent indicated they are highly likely to follow. This illustrates how important it is to keep advisors satisfied in the areas of compensation, product and service breadth, and home office support, for should the advisor leave, much of his client base is likely to follow.

There’s a lot at stake for the US brokerage industry in the next decade. The aging of the 76 million strong US baby boomers will put trillions of investment dollars in play as investors shift goals from accumulating assets to drawing income. It is vital that brokerage marketers understand the changing tastes of their clients, by harnessing research to monitor the drivers of satisfaction and loyalty, both with investors and advisors.

The most successful financial services firms will also take market research a step further, by developing specific metrics to track and measure the satisfaction and loyalty of their firm’s constituencies, and the effectiveness of communications and service strategy. After all, client loyalty is often more influenced by client perception than firm reality.