Financial advice: what FT readers say
Personal chemistry is what's holding the advice industry together, reading between the lines of a recent FT survey of readers about their relationship (or not) with financial advisers and wealth managers. This is remarkable in today's technology-dependent world and in a field where human behaviour is notoriously erratic.
304 readers is not a broad sample to draw inferences from about numbers or attitudes so it was more interesting to read what FT Money's Claer Barrett picked out from the comments to open questions. Clients of Fowler Drew might be intrigued to think how much or how little they share, or once shared, the views of these fellow individual investors.
Let's start with inertia. Obviously all of our clients got over that one. But I suspect most would freely admit that it was only 'eventually'. Inertia can arise from knowing all is not well and postponing action to deal with it. But it can also arise from not questioning, and thus implicitly accepting that all is well. Inertia as complacency.
69% of the sample were customers of the advice industry. Of the non-customers, 45% were happy doing it themselves or didn't think they were wealthy enough to need advice, leaving only about 15% of the sample who were not engaging out of any negative assessment of what the industry had to offer. And that drops to 12% if we exclude those wanting to engage but evidently unable to find an adviser they trust or like. That's a fairly small proportion who've given up on the industry.
Of the customers, 79% said they were either satisfied or very satisfied with the 'value for money' they were getting. Now that could be because it's cheap and they want it to be or because it's expensive and they think it needs to be. You would have to read between the lines to gauge which but, since 'high costs' (including portfolio-based fees) were singled out by Claer Barrett amongst the answers to open questions, we might assume the second holds more than the first. This is Waitrose, not Lidl: it's expensive but it needs to be. And it's apparently delivering the value it needs to. So it's not so surprising that 57% of the sample have never changed adviser.
Well 'we' (the Fowler Drew community) all know, don't we, that all is not well with the industry's value proposition. That's why you're either working here or a client of ours. What is it that the industry is doing so well to foster client complacency? Not, apparently, hiding fees: all but 7% were sure (rightly or wrongly) they knew how much they were paying. What else? There is again a clue in Claer Barrett's interpretation of the answers to open questions. "Face-to-face advice was considered necessary by the majority of readers who responded to our survey — although many now expect this to be backed up by emails, and the ability to view investment portfolios online. As markets bounce up and down, traditional advisory firms may see this as creating work for themselves as they are bombarded with calls from clients seeking reassurance about volatility. However, those who had found an adviser they could trust held this relationship in the utmost esteem. When we asked “what would prompt you to change adviser?” one reader answered: “Either me or my adviser dying”. Several readers told us they had followed the same adviser through three or four different employers. Similarly, most had found their current adviser through word-of-mouth referrals, often from family members, friends or fellow professionals."
The chains that bind are human and personal and they do not bind to a firm so much as an individual: referrer to client, client to adviser. If trust is important, it is not necessarily in the firm but in the person.
This ought to strike anyone as bizarre in 21st century Britain. It is how I described the industry in No Monkey Business, but that was nearly 20 years ago. I attributed it then to advice having developed as a form of dependency on experts, with experts eager to play the role of proxy decision makers. It has as it's most common question: 'what would you do if you were me?' What I set out in the book, and turned into a fully-developed business format in Fowler Drew, was an advice model that depended instead on informed personal responsibility. Whilst this requires trust in the source of the information, it explicitly excludes trust in proxies. The answer to the commonest question can only be 'I'm not you'.
The means by which we support informed choice, at the high level that most explains outcomes rather than the delegated day-to-day implementation, are technology-based. This fits both the complexity of the decision processes and the need for consistency and objectivity. Consistency in decision making is important both between individual advisers and over time and that comes with process, not person. Objectivity is critical to excluding the behavioural biases and emotional distractions that advisers, as well as their clients, are prone to. Interaction with computers, albeit with the aid of a human adviser, has therefore been the basis of our approach since we started and the focus of our constant efforts to improve the ease of interaction and level of engagement. This is how similar decision challenges have been addressed in the institutional market, with increasing reliance on informing and supporting lay clients with quantitative tools and effective communication of them. This shift has been helped by legal initiatives to force fiduciaries to take appropriate responsibility even when relying on professionals.
These are all obvious and intuitive reasons why the chemistry-based personal relationship model for individual advice should strike people as flawed. But it is not the only reason. A new model is needed to deal with the high costs that are harming complacent customers, as well as being an important reason for non-customers to avoid engaging with the industry. Of those not engaging, 17% quoted high costs as the reasons, which adjusting for those preferring DIY rises to nearly one third. This suggests an extreme disparity with the value satisfaction measures for these who are engaging. There is a simple way to explain this which I have come to accept: you either get it or you don't.
Claer Barrett also drew attention to the reluctance of the British to talk about money. This does not prevent personal referrals being the most important means of finding an adviser (for 51% of this sample). But recommending is different: it is an act of generosity to the recipient, not to the firm mentioned, and generosity is a perfectly valid feature of personal chemistry. What makes it generous is the potential value of the firm to that individual: the difference the firm can make. The question is, can it really make a difference if the relationship itself is not going to be different?