Trust plays an overwhelming role in almost every facet of one’s daily life. It is most noticeable in our personal and professional relationships.
“Trust’’ is one of the dominant factors in the relationship between affluent investors and the advisors they work with. Allowing an advisor to determine how funds are invested is the symbolic representation of trust.
But while trust is earned over time, trust can also be erased. Just as there are unscrupulous doctors, lawyers and accountants, there are financial advisors who do not put the interest of their clients in the forefront and do not necessarily follow the prescribed investment plans of the investor who put their trust in that advisor.
Spectrem’s quarterly wealth segmentation series study – Advisor Relationships and Changing Advice Requirements – delves into the investor-advisor trust factor deeply, and includes new insights comparing the trust investors have in their advisor to the trust they have in their physician, attorney and accountant.
“This new finding examines the trust investors have in their advisors to the trust they have in other professionals they encounter where trust is a major factor in the relationship,’’ said Spectrem president George H. Walper Jr. “This research is not only meaningful to advisors, but could also provide insight to professionals in those other occupations. The finding is that trust levels are not as high as most professionals would want them to be.”
Spectrem’s study surveyed investors in three wealth segments. Their trust level in advisors increased as wealth increased.
Investors were asked to place their trust level in their financial advisor on a 0-to-100 scale, with “0” indicating no trust and “100” indicating great trust. For the non-Millionaire investor with a net worth under $1 million, the trust level average was at 79.48. For Millionaires with a net worth between $1 million and $5 million, the trust level was at 82.52. For Ultra High Net Worth investors with a net worth between $5 million and $25 million, the trust level average was only slightly higher, at 83.54.
Should these averages be higher? Do advisors expect their clients to have 100 percent trust in their advisor?
It is probably incongruous to believe investors would trust their advisor more than they trust their primary care physician, and they do not. The research shows that trust in doctors was rated at 81.54 for non-Millionaires, 82.64 for Millionaires and 85.37 for UHNW investors.
Advisors should probably feel pleased that their trust rating is as close as it is to the physician ratings. In all cases, trust levels in attorneys and accountants was lower (attorneys were well below the others in average rating).
The Spectrem research takes the question of trust one step further, asking investors to define trust as it relates to their primary financial advisor. Given a set of five possible responses and the freedom to select more than one choice, the most popular selection was “looking out for my best interests”, followed not so closely by “proactive in calling me and telling me important things that pertain to my investments.”
Just as the level of trust fails to reach 100 percent, so do the definitions. On average, just over 80 percent of all investors selected the “best interests” response. Some investors believe trust is earned by charging fees that reflect the value of services provided, while others believe trust is earned by mistake-free performance. Still others believe trust is earned when an advisor admits a mistake.
Top Takeaways for Advisors
While trust is a huge component in the investor-advisor relationship, it is not something that can be promoted or demanded. An advisor is not going to earn the trust of an investor by asking “how can I earn your trust?’ That sounds like something a snake-oil salesman would say. Instead, trust is earned, and advisors must ask investors “How can I best serve your investment needs?” The answer will point the advisor toward the actions that can earn trust.
If trust was easily earned and overwhelmingly given, there would be no need for a fiduciary standard. However, the Department of Labor’s new fiduciary regulation is demanding advisors working with retirement accounts serve the client’s best interests in all decisions. This ruling, created to safeguard the retirement accounts of aging Americans, not only proves that trust can be questioned, it also means that knowledgeable investors will be looking for a fiduciary performance in all of their investments, not just the ones that affect retirement accounts.
The bottom line for advisors? Provide good service and make the right investment choices for the investor not for yourself.
*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR). There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR.
©2016 Spectrem Group