Global study highlights areas for advisors to prove their value and uphold the financial-services industry
Saying that people need an investment advisor is almost like saying proper hand-washing is essential; everyone knows it already, and both nuggets of wisdom are more vital than ever against the backdrop of a global pandemic and recession.
But ultimately, the choice to engage and stay with a financial advisor depends on trust, which begs the question: how do advisors build and strengthen trust?
That’s the topic addressed by the CFA Institute’s recently released Earning Investors’ Trust study, the fourth edition of a report that originated in 2013.
Growing trust from humility
“Trust is ultimate source of value that investors will derive from their advisory relationship,” said Stephen Horan, Managing Director, Americas Region at the CFA Institute. “Beyond that, I think it’s the ultimate source of value for society at large, and we’re going to have a hard time getting out of a lockdown without it.”
Just as the transition out of the current lockdown requires extreme management and caution, managing a portfolio in a depressed and tense market requires deliberation and an expert hand. For instance, an investor left to their own devices might be encouraged to snatch up stocks at depressed valuations, but end up overlooking other risks with respect to the environment and their own personal situation.
“I think what can destroy trust is when you make predictions with unrealistic confidence that end up not coming to fruition,” Horan said. “It’s natural to want to be hopeful in a time like this, but as an advisor, having a bit of humility and less hubris instils more trust.”
Prioritizing personalization
Aside from providing much-needed grounding for their clients, professional advisors must also recognize clients’ personal preferences. That’s reflected in the survey, which revealed that 48% of retail investors would be willing to pay more for personalized investment products and services.
“I think that personalization is as much about product as it is about process,” Horan noted. “Investors all have different aspirations and ambitions, and they don’t necessarily need to put their resources in special vehicles to get to where they want.”
As an example, he pointed to retirement preparedness, cited by 50% of global investors and 60% of those in the Americas as an investment goal aspiration.
“Even where that objective is the same from investor to investor, there will be other objectives against which it should be balanced,” he said. “And what it means to achieve that goal, as well as the best means of achieving it, is going to be uniquely personalized.”
In the realm of pension-fund investing, many strategies are built based on asset-liability management; a lower-tech cousin to that, goals-based investing, has taken root in the private wealth space. Both are concerned about creating highly personalized solutions, which can be built from generic or generally available investment products.
“A lot of personalization is around communication and education, as well as the engagement part of the advisory process, which is a key part of the value proposition for advisors,” Horan said. “Being able to receive communication that is tailored to your circumstance and preferences is another element of personalized financial education.”
Human elements
The survey also highlighted the growing importance of sustainable investing among both institutional investors who value it for risk-management purposes, and retail investor who want to invest based on their values. Canadians showed a somewhat outsized appetite for ESG investing, with 71% of Canada-based investors citing it as a priority compared to just 69% of global retail investors.
“The environmental and social part of that is really where it gets personal, particularly for retail investors,” Horan said. “People’s values affect their stances on different issues such as climate change, renewable energy, and nuclear energy, for example.”
And while investors around the world overwhelmingly trust humans over machines for investment advice – in Canada, 81% would pick humans, greater than the global average of 73% – nearly half of investors surveyed say they trust advisors more due to increased use of technology.
“This is validated by other studies we’ve done on artificial intelligence, which found that technology bolsters confidence in advisors who can show they’re able to become more efficient, effective, and adaptive because of it,” Horan said. “It also circles back to the importance of communication, especially in this virtual environment: the more frequent and individual touch points a client can have with their advisor, the more trust there is.”
Signals amid the noise
Another important aspect of investor trust concerns brands, which has risen in importance among Canadian investors from 32% in 2018 to 40% in the most recent survey. As Horan explained, brands convey signals about the quality of advice and service that investors can expect, though their importance fades as the client-advisor relationship evolves.
“Professional credentials also send a powerful signal for investors when information is scarce and uncertainty is abundant,” he said. “Brands and credentials act as trust time-savers during the search process.”
From a standpoint of self-interest, an advisor would want to bolster their credibility and trustworthiness as a way to attract prospects, retain clients, and garner referrals. But more broadly, an advisor’s interactions with their client may also strengthen the financial-services industry: 57% of advised retail investors in the survey say they have trust in the financial industry, compared to just 33% of investors without advisors who said the same.
“That just underscores the role of the advisor – whether it’s through leveraging the brand, leveraging technology, or pursuing personalization – in building value not just for the investor, but for the investment industry as a whole.”
