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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
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  • Comments:   DISQUS_COMMENTS
Are you smarter than a dentist? What older investors really want
Recent research indicates that older investors frequently don’t trust their investment advisors. A major reason is that they don’t trust firms that offer too many “free services.” They simply suspect that somewhere along the line, they’re getting taken. But it doesn’t have to stay this way.

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
“A lot of these people do have an ulterior motive. And you know, they’re selling products that are being recommended by management of their firms and they call you up and they tell you they’ve got this terrific widget. If you get in on the ground floor… You know they're making money maybe they've got a position in the stock or the bond or whatever the case may be. And you’re a little bit suspect when they’re making a commission. You really wonder, are they working for themselves or working for you? —Mass Affluent Retiree

drawn from Hearts & Wallets recent focus groups

What’s wrong with the status quo
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.
Why some become “general contractors”
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.
Turning distrust into trustworthy opportunity
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:
• The most critical need concerns communication. Investors want clarity on how advisors and their companies are getting paid. They want to understand why certain advice is free and how they can ensure the advice they receive is the best for their specific needs. By understanding what investors are seeking from advisors and developing a new advice model, financial institutions can reconnect with older investors.

Older investors want personalized, worthwhile advice service. Investors also want advisor incentives aligned with their (the client’s) best interests.
• Investors don’t like marketing hidden inside “advice.” Investors are dissatisfied with the current range of personal financial counseling, particularly retirement savings and income advice, which is often used as a sales incentive. They have real needs and want answers to their questions in four categories: investment selection; retirement questions; support with paper work and deadlines; and life planning, which is especially sought after by those who aren’t on a solid track financially.

For investment selection, investors want impartial advice that isn’t based on the highest commission from product manufacturers.

What older investors say
“I do a lot of research. I’ll read Kiplinger magazine. Anything on the internet that I can research” —Mass Affluent Retiree

drawn from Hearts & Wallets recent focus groups

Engineering a solution
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.
2. Demonstrate how the advisor--and the team behind the advisor--adds value. In many cases, the only thing the investor sees is the advisor’s specific recommendation of certain investments—the end result of the advisor’s work. The advisor needs to spend more time communicating the amount of effort taken to monitor the client’s portfolio and research securities. Advisors should demonstrate how they ensure that the client’s investments are prudent.

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.
3. Consider offering multiple models. Banks should consider offering investors a choice of service models, as in our firm’s tests of concepts. When concepts are trialed, the investors respond with interest. In many cases, investors aren’t aware of various alternatives until they are presented.
4. Add “bright lines” to separate offerings. Investors like the separation of personal finance and investment advice. It’s part of that clarity issue again.


What older investors say
“I am making the decisions. Sometimes I ask for his (advisor’s) opinion” —Affluent Retiree

—drawn from Hearts & Wallets recent focus groups

A segment of older investors, the mass affluent, also indicate a willingness to pay a la carte for high-touch service. Although they don’t have sufficient assets to qualify for more personalized service as part of their “regular” investment service, they would like the option to pay for a more consistent, higher-level of service.

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.
5. Seek for meaningful differentiation. Investors told our researchers that the option of having the advisor serve as a fiduciary agent is appealing. They see this as a way of ensuring the advisor acts in their best interest.

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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