Are you smarter than a dentist? What older investors really want
They don’t trust freebies
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- Written by Chris Brown and Laura Vara
Many older investors are frustrated with the traditional financial advice model. Ultimately, they don’t get it--and therefore many don’t trust it.
But they will willingly consider a range of alternative solutions. These potential solutions could open the door to rebuilding trust with financial institutions as well as new revenue streams for those organizations.
These are among the findings of a new study by our firm, Hearts & Wallets, which specializes in retirement and savings research.
In recent years, Hearts & Wallets has tracked a growing disconnect between what older investors desire in financial and investment advice and what they currently receive from providers.
In the most recent focus groups, older investors say they are confused about why advisors offer some advice, such as personal financial advice, for free--and they question the advisor’s motivation and the value of this advice. And, they view investment selection advice as biased towards whatever security pays the advisor the most. (For research details, see the end of this article, “About the study.”)
Not a recipe for a relationship that should be built on trust.
What older investors say —drawn from Hearts & Wallets recent focus groups |
In the traditional model, investors pay for advice on investment selection through fees on transactions or assets under management, and often receive planning advice “thrown in” for free.
Then the advisor includes a number of advisory services--from estate planning, insurance, and tax planning--and says that these will be provided as value-added services.
But, the skeptical investor looks at the other service providers in his life, who don’t “throw in” things. He wonders, for example, why his dentist isn’t throwing in free x-rays or teeth whitening.
The model doesn’t make sense to most investors, who wonder how the financial services provider is really making money. Furthermore, the lack of a clear revenue motive for providing these services likely keeps advisors from proactively providing this support once a prospect has been converted into a client.
Distrust is high and is increasing, according to ongoing Hearts & Wallets’ research. Few investors understand how their providers earn money—and understanding clearly what is in it for your provider is a key driver of trust.
Banking institutions fare poorly in the trust dimension for investors. This is evidenced in banks as a channel underperforming on two key drivers of the Hearts & Wallets score--a measure of intent to recommend and intent to invest more. Banks score on average a 7.1, as compared to 7.8 for discount firms.
Communication is a major factor in trust. This contributes to the low ranking for banks, which came in as a primary provider with an average rating of 6.2 for how well the customer understands how the provider makes money in the Hearts & Wallets 2010 Quantitative Panel. The bank primary provider rating is lower than 6.8 for full-service firms and 6.76 for discount firms.
The difference in trust level is meaningful not only in sentiment, but in behavior.
The high level of mistrust leads investors to take matters into their own hands. Many older investors with advisors first seek out investment ideas from other sources and then bring those ideas to the advisor to implement. These investors tend to act as “general contractors,” running their own show.
This segment of investors prefers to serve as the head of their investment portfolio, gathering their own financial information and then parceling out actions to advisors and others. They seek out advice from media resources, especially online, and from family and friends.
Only when they feel they are “in the know,” do they go to their advisor.
The end result is that investors are doing a lot of extra legwork because they do not trust advisors.
Bank advisors can change this situation. This disconnect presents an opportunity for those financial organizations willing to change the traditional advice model to address these unmet investor needs. Recognize two issues:
Older investors want personalized, worthwhile advice service. Investors also want advisor incentives aligned with their (the client’s) best interests.
For investment selection, investors want impartial advice that isn’t based on the highest commission from product manufacturers.
—drawn from Hearts & Wallets recent focus groups |
Banks can take a number of steps to change the dynamic and rebuild trust:
1. State fees explicitly for distinct services. Clearly explain the value proposition to investors.
Banks, especially large banks, have a special challenge because they are starting from a disadvantaged point. Community banks may not face this disadvantage because their fee structures may be more straightforward, or because there is more a personal, one-on-one relationship, which gives the client more certainty that the individual provider cares about them.
The client is paying for these activities and it is why the client hires a professional to manage his or her money. It just may not be clearly articulated in the value proposition.
A number of resources could be created to help advisors demonstrate value--from training and software to worksheets and collateral materials. These resources could help educate investors about the additional value provided. It is important that the advisor say, “Here’s how I add value for you. Here’s how I charge fees. Here are things that I do that you may not be aware of that are important for your financial well-being. Here’s what makes me an expert.”
There needs to be much more communication between advisors and their clients rather than just the transactional conversation. In addition, the advisor must provide proactive client communications, especially when the client’s securities are caught in a downturn. This is a critical aspect to rebuilding trust.
—drawn from Hearts & Wallets recent focus groups |
Here’s an example: They are frustrated that when they call in they often get someone who is unfamiliar with their account. These investors want to talk to someone who knows them and understands their goals. They want to be treated like individuals and not an account.
Since this willingness is more of a personal preference than an attribute tied to asset level, it is an important revenue opportunity for banks that are willing to work with mass affluent investors.
Many investors aren’t aware of the Retirement Investment Advisor designation. They assume all advisors are the same. But when different concepts are tested, investors respond positivity to the ideas of having someone take fiduciary responsibility.
Investors also like the option of paying advisors a flat fee, whether that is an hourly rate or an annual charge.
Older investors are searching for a trustworthy financial services partner. Savvy institutions will respond to their needs to build a better future for both investors and their own organizations.
About the authors Chris Brown, founder and principal of Sway Research LLC, and Laura Varas, president of Mast Hill Consulting Inc., are partners in Hearts & Wallets, a research firm and multiyear retirement and savings investor research series, based in Hingham, Mass. H & W is an independent, third-party research firm that focuses on investor needs and competitive best practices in saving and investing for retirement. |
About the study
This article relates insights from a study based on nine focus groups conducted in Philadelphia, Chicago, and Miami in April 2011 with older investors. It also draws on the firm’s ongoing body of quantitative and qualitative research. The focus groups included Pre-Retirees, Americans who identify themselves as within five years of retirement and the household historical primary breadwinner stopping full-time work; Late Career Investors, Americans ages 50 to 65 who are not yet retired, and the household primary breadwinner is not considering retirement within the next five years; and Post-Retirees, individuals who are currently retired.
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