Disclosure of fees, cost and conflicts of interest linked to building client trust
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Investors fear another crisis in the next few years, meaning advisors’ trust and transparency will be tested.
Rebecca Fender, head, Future of Finance at CFA Institute, believes an asset manager’s performance is correlated with his or her client during these times – such as 2008 – and said her organization’s The Next Generation of Trust study showed the issue boiled down to two levels: industry and individual.
On a one-to-one basis, Fender said an advisor’s performance and skill is obviously crucial but that influencing external factors outside of the markets is equally important.
She said: “Part of the message here is: what are the things you can control? We know that regular communication is clearly something you have to have when there are ups and downs in how the markets are going – that’s going to give you that stability.”
The other thing she said that advisors can do to enhance trust is improve transparency around fees, costs and conflicts of interest, adding that the study revealed the biggest gap was between what investors want and what they receive related to disclosure.
Encouragingly, she said investors were relatively happy with the performance of individual firms, although the industry as a whole has some work to do.
“We think that transparency is good for the markets and sometimes there’s this overarching concern of I’m not sure what I don’t know,” she said.
“One thing I do think is important about trust is there are two levels. One is about the reputation of the industry; do I trust the system? What do I think of when I hear ‘investment management’? The other is the experience you have: do I trust the individual I’m working with? The reputation of the industry versus client experience, we found them really different.
“We think the financial industry will continue to have its challenges with its reputation and inevitably there will be scandals but it won’t represent the majority of the people working within the industry. What I think is actually very encouraging in our recent work was that people were pretty happy with the investment firms they worked with.”
One area advisors can use to build this client experience and trust was technology. Fender highlighted “transactional trust”, where investors prefer computers to humans. However, when it comes to advice and “relationship trust”, it was the polar opposite.
She said: “There was distrust with advice from computers versus people and this was most significant in Canada and the US. And when you look across the world, the personal relationship between a person and the advisor is the most [valued] in Canada and the US.”
She added: “I think trust is built with the addition of technology with people. It’s not an either-or, people and technology are better together and I think that’s what we’re seeing.”
