Separating Investment Selection and Personal Finance Advice May Be a Key to Increasing Trust

When you think about the vendors in your life-your lawn service, your doctors, your lawyers, others - do you understand what they do for you, what expertise they bring, how they get paid and how to assess whether they’ve done a good job? Of course you do. Otherwise you wouldn’t hire them.

Why should financial advice be any different? In 2010 focus groups, Hearts & Wallets first identified Three Screaming Unmet Needs that investors feel our industry urgently needs to do a better job on:

1. Tell me what you do

2. Tell me how to evaluate you

3. Tell me how you make money

Going forward, in addition to being a leading thinker about emerging retirement trends, it is our mission to decipher the keys to addressing these unmet needs, which are holding Americans back from accessing the advice they need, and dampening revenue growth in our industry.

According to the Chicago Booth/Kellogg School Financial Trust Index, trust in our industry is at an all-time low. If you are a strategy or technology people designing next generations of advice platform, a senior executive or strategy group evaluating changes to service model, such as fiduciary status, a finance professionals working on pricing, a marketing communications professional who wants to reflect the consumer’s language, or a sales, distribution or relationship professional thinking about the next source of competitive advantage or changes to service model, you’re probably thinking about trust and clarity, too. Hearts & Wallets has been concerned about this for some time, and has been researching drivers of healthy, trusting financial relationships for several years.

Lack of understanding of economics is one of the biggest drivers of low trust, but trust is also built on deeper mutual understanding of values, which includes what our mission is-whether in life or business. The transition from commissions to fee-based relationship pricing exacerbated the confusion and seems to be coming to a head. How can we have a “relationship” if we don’t understand each other? The lack of clarity about what we do and how to evaluate services-the fundamentals that make your relationships with your lawn service, or lawyers, or whomever, possible-is, quite logically, holding people back from getting the advice they need, discouraging trial, and dampening revenue growth. Hearts & Wallets believes this is unstable situation that is begging to be fixed. Those who do so first can unleash pent-up demand for clear financial advice and support.

Through Advice/Pricing concept tests, and analysis of the go-to sources of advice, our newest report-Addressing the Elephant in Financial Services: Insights into How Older Investors Really Want to Receive, and Pay for, Investment and Personal Finance Advice-provides insights into attitudes to advice and pricing, as well as ample ideas about new offerings and pricing structures that can help address this confusion. This Hearts & Wallets Explore qualitative research report draws its findings from nationwide focus groups conducted with older investors in April 2011, some of the areas we feel are important include:

• Separating and clarifying “personal finance” advice, including retirement income questions, from “investment selection”
• Implementing as many of the keys to becoming the trusted go-to resource as possible
• Enhancing trust and creating additional revenue with new services and improvements to pricing clarity and structure, such as attaching clear fees to distinct services like income planning
• Developing a strategy for fiduciary standards
• Encouraging and supporting “General Contracting” as a means to reassure investors in their decision-making process

What’s behind the confusion? In a nutshell-it’s treating financial advice as a prelude to a sale. Financial services firms and advisors often promise a client much more than just guidance on buy and sell decisions, such as retirement and financial planning, asset allocation strategy and monitoring, guidance on insurance, estate planning, taxes, or college savings. However, providers seldom charge separate fees for these services, preferring instead to offer them as free, either in exchange for holding products, or as a prelude to a sale. Ask yourself, how much value would you place on something that is offered for free? How much confidence could you have that the company or person offering the service is doing a good job, when they are not being paid for it? Would you wonder what hidden incentives are making it possible?

We look forward to discussing these topics with you soon,

Chris & Laura