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Building Investor Trust: What works?

Investors may not actually know themselves

Building Investor Trust: What works?


For five years Hearts & Wallets, a retirement and savings trends research firm, has tracked investor trust in investment providers--tracked it on a steady downcurve.

In its latest study, the firm found that less than 20% of Americans completely trust their financial services providers--a five point drop since 2010.

In fact, the firm's research indicates that more than half of those surveyed--55%--fear that their financial advisors will cheat them.

What's on the line is not just the business that providers currently have, but a huge chunk of money that Hearts & Wallets believes is mobile enough to be ripe for some kind of movement.

The firm believes that 60 million American households and $16 trillion are at stake, with holders either looking at trying out a new provider, rolling over existing investments to a new provider, or consolidating investments from multiple providers to fewer, or one.

Build trust now, or wave bye-bye to assets

The consulting firm believes providers of retirement and other investment services should pay greater attention to the issue of customer trust, not taking it for granted. Where a firm consistently earns high trust among its customers, it can see nearly double the share of business that less-trusted providers command. In addition, customers who trust their providers will much more likely refer other investors to the provider, further increasing business.

The firm believes that what customers say builds trust and what actually  builds trust, are two different things. The firm arrived at this conclusion by analyzing behavioral patterns indicated by the results of its surveys of consumer investors.

"Some factors that individuals say affect their trust, such as how tactical and knowledgeable the advisor is, aren't actually mathematically linked to trust," the firm states. "Being knowledgeable in itself may be desirable, but it is not a way to build trust."

What builds up trust?

Hearts & Wallets reports that for one out of three investors, a key trust issue is proven investment results. But trust also turns on not only what the investor gets out of the relationship, but from a good understanding of what the investment advisor/provider gets out of it.

The firm found that trust can exist no matter what the compensation model, and no matter what the mix of salary, fees, and commissions.

"It's reasonable for a financial professional to earn a living, and only a few investors really want to write checks out of pocket for the cost of expertise," the firm reported. "For a better provider fit, the investor should understand what the firm does and doesn't offer. It's important that firms clarify expectations. Don't try to be all things to all people."

The firm found that "one of the most important trust drivers overall is how well the investor understands how the advisor and firm earn money. Specific fees are much less important than understanding how the whole system of incentives works. To build trust, investors should not be afraid to ask the advisor about his compensation or the firm's business model to understand all the incentives."

[This article was posted on April 5, 2013, on the website of ABA Banking Journal,, and is copyright 2013 by the American Bankers Association.]

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