It’s not enough for financial advisors to simply do what they were hired to do — they must continuously nurture the advisory relationship to build trust to improve business outcomes and client retention rates, new research suggests.
Being the client’s advocate and acting in his or her best interest top the list of attributes that are central to building trust between an advisor and an investor, according to findings in the latest installment of Vanguard’s Advised investor insights™ series.
The study, which is based on a two-part research process consisting of interviews and a survey, examines key drivers of trust and what impact higher levels can have on client relationships. In the survey, investors were asked to rate how much trust they have in their current financial advisor based on an 11-point scale beginning with 32 attributes that were divided into three trust components: functional, emotional and ethical.
Not surprisingly, investors who have higher levels of trust are less likely to end their advisor relationship and more likely to refer friends and family to their advisors. In fact, more than 75% of the “high-trustee” respondents have already recommended their advisor compared to less than half of those with medium trust. Moreover, 70% of high-trust investors say they are likely to give their advisors additional money to invest, while only one-third of investors with medium trust would do the same, according to the findings.
Building Trust
Overall, 81% of the investors surveyed were in the high-trust category, consistent with the fact that these investors are with their current advisors, but the level of trust varies by certain demographic characteristics, including investor age and tenure with an advisor.
For example, 72% of investors under age 50 give their advisors a high trust rating compared with 86% of those age 65 or older. Similarly, high trust is found among 65% of investors with less than a year of tenure with their current advisor, but among nearly 90% of those with tenure of 15 years or more, the study shows. Moreover, more knowledgeable investors are also more likely to view their advisors as trustworthy compared with those who are less knowledgeable.
Interestingly, functional trust and ethical trust accounted for 17% and 30% of overall trust, respectively, but emotional trust was the largest component, accounting for 53% of total trust. The report explains that it “may seem counterintuitive” that the functional aspects of trust have the least effect on overall trust, but that it helps to think of functional trust as the first layer investors place on their advisors, beginning at the selection phase, where trust is based on “proof.”
The top two factors that determine overall trust — being the client’s advocate and acting in the client’s best interest — registered at 17% and 15%, respectively. Both of those numbers were nearly twice as high as the next factor, “Is someone I can relate to.” The rest of the attributes were found to have progressively weaker effects on overall trust, the findings show.
The report points out that the aspect of functional trust with the highest impact on overall trust — having the ability to “conceive, execute, and reassess a financial plan” — is ninth on the list, which is one of the most important reasons for hiring a financial advisor, but yet has just a 4% impact on overall trust.
Breaking Trust
While emotional trust is regarded as the most important aspect, a failure in any of the reasons associated with the three key components (functional, emotional and ethical), such as portfolio underperformance, communication issues, neglecting the relationship and poor investment choices, can cause a breakdown.
The most commonly cited reasons were related to investment performance and neglecting the relationship. Based on a list of 17 reasons for broken trust, the top seven findings included:
- Caused my portfolio to underperform: 46%
- Did not pay enough attention to me or my portfolio: 44%
- Steered me toward poor investment choices given my risk tolerance and goals: 43%
- Did not achieve what they set out to achieve for me: 35%
- Did not make me feel that my business or portfolio was important: 34%
- Lack of timely communication: 34%
- Did not follow up or do what they said they would do: 25%
Technology’s Role
The report emphasizes that the expanding role of technology may change the nature of trust in the advisory relationship. While an online presence may help with client prospecting, advisors should also recognize the growing importance of online customer reviews and the possibility that every interaction could be subject to an online review. Vanguard suggests that financial advisors should take steps to ensure a positive client experience and “be vigilant” in addressing any negative experiences with the affected client, both personally and online.
