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“You have to find an adviser you can trust.” Well-meaning advice, but how does one know if they can trust an adviser unless they’ve met their financial goals at retirement.
While looking for someone you can trust sounds like perfectly sensible guidance, financial advice is what’s known as a “credence good” – something that is difficult for the purchaser to evaluate at the time.
Simply put, the proof of the pudding is in the eating. But with financial advice, you often do not know if that pudding has been well digested until years or even decades later.
A new research paper published earlier this year in the Judgment and Decision Making journal offers a unique perspective on the role of trust when receiving advice. Instead of looking at the role of trust from the perspective of the client trusting the adviser, it looked at the role of an adviser trusting the client.
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The findings were eye-opening. When advisers trusted clients, clients were more likely to value the advice – and more likely to follow the advice as well. Advisers who didn’t show signs of trust in the client were associated with advice that was valued less, and less likely to be adhered to.
Advice adherence matters. It’s well studied in the medical sciences because if a physician diagnoses a condition and then prescribes a course of treatment, it would be clear that the value of that advice can be better judged if the patient follows the prescription.
The same applies to financial advice. If a financial planner indicates that you need to significantly increase your monthly investment contributions to be in a position to retire at a desired age, and you don’t follow that advice, it should not come as a surprise if you end up needing to work longer. Also, why pay for advice if you’re not going to follow it?
A lack of trust in financial services can partly explain why not all advice is followed. There has been plenty of ink spilled on financial product sales masquerading as advice. But there are plenty of financial planners that are worth their cost.
It is also interesting from the perspective of the value of human advice in an increasingly digital world.
If feeling trusted and respected by an adviser makes you more likely to act, what does this mean for advice provided by AI? Tools such as ChatGPT can’t exhibit trust in a person. If feeling trusted helps people follow through, then that’s a big reason why human relationships still matter.
One of the other emerging sources of financial advice has been finfluencers. More and more people have turned away from traditional channels of advice and toward social media, such as YouTube, TikTok, Instagram, and podcasts.
Finfluencers lack the oversight of a compliance department, unlike a licensed financial adviser, but they can have large, rabidly loyal followings. They call them finfluencers for a reason.
Those with larger accounts tend to be associated with full-time creators who make their audience feel heard and understood. This lines up well with the paper’s findings: the heightened sense of two-way trust is powerful and the creators’ content is persuasive.
It’s important to understand that feeling trusted by an advice provider – whether they’re a licensed financial adviser or a finfluencer – should not be conflated with assuming the advice is good. So what, then, is the takeaway from this research?
First, ask yourself if it feels like the advice provider trusts you. This could be important factor in whether you adhere to their advice. But then, you need to still think about the merit of the advice.
Feeling trusted by the adviser makes the advice more persuasive, so you need to take extra time to question the advice and have them justify it. If it is truly a trusting relationship, a little pushback could lead to a strengthened relationship as well.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.