Executive Summary
As the financial planning profession continues its inexorable march towards a fiduciary client-centric standard of care that minimizes or outright avoids conflicts of interest, those most passionate about carrying the torch have often been the most vocal in promoting those standards within their own businesses. Yet recent research shows that from the consumer's perspective, "fiduciary" is confusing and the word "fees" evokes an outright negative response; the special meanings we attach to those words inside our industry have translated poorly to the general public. The key, then, is to figure out how to operate in the interests of clients, while communicating a message that is less about the battles being fought inside the industry and more about how the client benefits. Otherwise, while it's true that those firms doing the best job of truly serving clients may be rewarded with the most referrals, they may not be able to convert those referrals to clients and grow their businesses if they have dug themselves a hole they can't climb out of by using consumer-unfriendly terminology in the first place!
The inspiration for today's blog post is the highlights of a recent study by Sullivan/Northstar entitled "Rebuilding Investor Trust" that attempted to answer the question "What Do Today's Affluent Investors Really Want?" The study, which has been repeated for several years, looks at trends in trust with advisors; for instance, Financial Advisor magazine highlighted their 2011 study, noting that trust in financial advisors had increase to 74% (from 61% in 2009), with 41% trusting personal communications from their advisor more than any other form of information.
As a part of the study, Sullivan/Northstar also examined general investor reactions to a wide array of terms commonly used by financial advisors, evaluating which were viewed positively, which were negative, and which were confusing. The surprising results? Some of the words advisors use most commonly to inspire trust, like "fee-based" or "fiduciary" are actually some of the most negative and confusing words in the advisor's lexicon, from the perspective of the client!
The Sullivan/Northstar Results On Fees
Surprisingly, "fee-based" was actually one of the terms that generated the most negative reaction from investors, with a whopping 64% of those surveyed expressing a negative reaction to the phrase. The only thing worse was the word "fluctuating" and by contrast, only 35% reacted negatively to "Whole Life" and only 32% to "Short Term"! And lest one read too far into this - assuming that consumers were making some finely sliced distinction between "fee-based" and "fee-only" as NAPFA does, showing up in the list of the top ten positive phrases was "No fee" with a 93% positive response rate. The remarkably simple message: consumers hate fees, and it casts a negative shadow on pretty much anything associated with them!
In point of fact, this shouldn't really be surprising. Outside of our industry's own "inside baseball" perspective on conflicts of compensation, the general public really does dislike fees. After all, how many people ever talk favorably about airline baggage fees, or cell phone activation fees? Would anyone really like airlines more if they advertised themselves as "fee-only transportation services"? Would we value the utility company more if it billed us a separate fee every time an electric line was repaired in our neighborhood, so that we would "properly understand the value that the utility company was delivering and ensure their business was appropriately compensated for each and every hour of work that was done on our behalf?" Of course not. In fact, the evidence from other industries is quite clear: attaching fees, especially standalone fees, is a way to discourage utilization of the service. In other words, as discussed previously on this blog, charging separate fees for financial planning is actually a fantastic way to reduce the likelihood anyone buys financial planning services!
Simply put, while talking about fees within our industry has one meaning, the reality is that it's industry jargon that most consumers don't understand. From the consumer's perspective, the conclusion is actually the opposite: fees are bad, associated with negative things, and stuff with fees is stuff to be avoided unless you absolutely have to pay for it (and then usually resented if you do have to pay for it!)!
The Northstar/Sullivan Results on Fiduciary
In the same manner that "fee-based" was negative in the Northstar/Sullivan results, "fiduciary" was just downright confusing. In fact, its 40% "confusing" response rate made it the second most confusing word/phrase of the study, just behind "life stage" at 41% and more confusing than "dollar cost averaging" at only 38%, as well as other common (but apparently confusing!) planning words like "concentrated" (35%) and "legacy" (33%).
That the fiduciary concept is confusing for the public probably isn't entirely news - many studies in recent years including especially the RAND study, as well as the ongoing struggles of both the industry and the media to explain the value and importance of the fiduciary duty - speaks to the lack of consumer understanding about what the fuss for "fiduciary" is really all about.
But the fact that it's actually one of the most confusing words we can use - in a world where most people don't like industry jargon and language they don't understand - implies that frequently talking about fiduciary could actually reduce trust with prospective clients, who are more likely to find you uncomfortable and untrustworthy for using jargon and talking over their heads, rather than being more trustworthy by virtue of your fiduciary duty!
And of course, in many situations, we as professionals then proceed to make the situation worse by trying to explain fiduciary, which as I've noted previously on this blog usually comes out less like explaining to the prospective client why you are good, and more like explaining why everyone else is bad... even though most people are clear that they don't like to work with professionals who bash their competition.
Is A Focus On Fees And Fiduciary Bad Marketing?
Ultimately, what the Sullivan/Northstar research suggests is that actually using words and phrases like "fee-based" (or ostensibly "fee-only") and "fiduciary" are actually less likely to garner clients than not using them, especially given how salient it makes the cost of financial planning. That's not to say that you'll never get a client by mentioning those terms. But it does mean that you're actually setting yourself up for trouble by leading with words and phrases that are viewed with negativity and confusion... giving you a hole you have to dig yourself out of before you even get started. And of course, if these words and phrases are prominent on your website, it's entirely possible that the client who got referred to you or found you through the internet took one look at your website with all its negative and confusing words and decided to move on without calling you at all. In other words, using language referring to the fact that you charge fees and are a fiduciary may be yet another way that planners lose clients before even meeting them once, without ever being aware that the prospective client was lost!
The point here is not to say that charging fees or operating on a fee model is a bad way to deliver services to clients, nor is it to imply that you shouldn't be a fiduciary. As I've written in the past, the only way advice should ever be delivered is as a fiduciary, period. But the decision about how to operate your business model is a separate matter from how best to market and communicate your value to clients.
From the prospective client's perspective, what matters in the end is not how you're compensated, or the standards you're held to, but the way those realities affect the client. Simply put, prospective clients care about the WIIFM - "What's In It For Me" - message in your marketing and value proposition. And like it or not, "Hey you have the privilege of paying me fees while I use fancy legal terms you don't understand" is not a particularly compelling WIIFM message, to put it mildly.
And perhaps more importantly, in the end your clients will refer you because of the outcomes they enjoyed, not because of how you explained you were compensated or the legal standard to which you were held. In other words, acting like a fiduciary paid via fees that has managed or avoided conflicts of interest to deliver superior results to clients still matters far more than just talking about it, anyway. But even that only matters if your prospective referrals aren't turned off by the negative and confusing jargon on your website!
So what do you think? If you were in your client's shoes, without familiarity of the financial services industry, what would you really think of paying fees or working with a "fiduciary" for advice? Do you have positive feelings about other businesses where you pay fees? Do the other professionals you trust even talk about being fiduciaries, or do they just act like one instead?
Michael,
These types of studies can be so discouraging for our industry. I have always felt that being upfront and transparent about fees was a way to show honesty and clarity of business structure to prospective clients. I have pages dedicated to it on my website, and also in my literature.
I then look at other professional’s websites such as CPA’s, attorneys, etc., and very few have any mention of fees or billing structure.
It certainly gives me pause and I wonder if I should re-think how I present my practice to prospects that I have yet to even meet. I will continue to present fee structures in meetings, but wonder if removing those references in the public domain would garner a greater response.
Robert,
I’m certainly not advocating that we forever hide our compensation from clients. I think transparency is a powerful positive for our profession in the long run.
The point, as you note here, is simply that there’s an appropriate time for delivering that message as a part of the trust and relationship building process with clients. And pushing the issue “too early” – particularly with the terms that we use – can be a negative.
Ironically, at least from the marketing perspective, “no commission” would probably be better received up front than “fee only” if the point is that being fee-only means not accepting commissions!
– Michael
Good one Michael.
I’m mindful of language to add clarity to client conversations. The word fees is tough to get around. I’ve pondered this a lot. I thought of “investment,” since clients are making an investment in education, guidance and partnership but too deceiving unintentionally.
Fiduciary is a bit easier as long as you actually stand behind what it means through action.
I ask clients – What does fiduciary mean to you? What does a trusted bond look like?
This industry is the WORST for turning lingo into cement. We use it way too often with clients.
Thanks again for your contributions.
Perhaps some good old fashioned Orwellian doublespeak is needed.
After all that is what the industry does best.
Junk bonds = high yeild
Equity indexed annuity = fixed indexed annuity
If it doesn’t sound good just change the name. Fee = rate
When we use terms like “fiduciary” or “fee-only” were talking about features. Clients are more interested in benefits.
I used to think being a fiduciary and being fee-only was a big deal and clients cared (or should care) about it.
I now feel we should do what’s right at all times regardless of business model. There a good advisors doing the right thing for their clients in a B/D commission environment just as their are fee-only, fiduciary crooks.
Actions speak louder than words, especially in this instance.
Good point about the features vs. benefits. Perhaps it is better to position something like this to a client/prospect “We only serve you, our client. We accept no third party payments (like commissions). Therefore, we are better able to serve your interests and not those of someone else.”
Very thought provoking post.
Good points. A classic case of the need to avoid using uptight technical jargon that would be talking oneself out of an opportunity to be of service to a prospective client.
I’m glad to see such a straightforward portrayal of this conundrum. In my view, this is a case of self-foot-shooting brought on by a fundamental misreading of what constitutes trust.
Financial professionals – like lawyers, consultants, actuaries, accountants and others who earn their keep by their cognitive skills – are emotionally invested in thinking that trust is based on what they happen to be good at. Hence they promote credentials, acumen, mastery of arcane models, awards from each other, and – that abstract concept to end all others – the absence of direct incentives to do the wrong thing.
By this twisted view of human psyche, we are supposed to count as trustworthy: proxies for IQ tests, old-boys-club memberships, and the idea that “we keep the booze locked up in the cabinet so we can’t raid it during working hours.” This is a view of trust that only economists could come up with.
Human trust is a good deal simpler – and mostly less cognitive. Yes, competence is good. But much more important are two other estimations:
1. do I feel that this person understands me and my life?
2. do I feel that this person has my best interests at heart?
No CFP Board designation that I’m aware of measures empathy. And the idea that “fee-based” is supposed to equal “has the client interests at heart” is the farthest of stretches. It’s like saying, “I am not a crook,” and expecting that to qualify for sainthood.
The industry has a cerebrally-centered and emotionally challenged view of customer buying behavior, and has not surprisingly applied the same view to trust. With predictable results.
It is possible for the industry to bemoan that it is misunderstood; the fault, however, lies not with the clients, but with the coldly rational-interests mentality that has so thoroughly misunderstood the nature of human trust.
This is a great example of where keeping things simple translates into less confusion. I believe it is Dr. Lutz that has several books on using thee “right” words to sy the say the same thing but resonate with clients and prospects in a more meaningful way.
So by chance did the study happen to mention any “good” words to use with clients??
Interesting post. However, I think there are some key issues that have been left under the rug. First off, as professional financial planners, are we part of an emerging profession, or part of the financial services industry with all its negative baggage? We don’t seem to be clear on that one ourselves, and until we are, you can be certain the general public will not be. In comparing professional financial planners to “other professions” such as law, accounting and medicine, these professions are well established and making the distinction regarding a fiduciary relationship would serve no purpose. However, the same cannot be said about the conglomeration of individuals, many qualified and more not, who call themselves financial planners, and in all truth are nothing more that snake oil salesman who make their living via highly honed skills of deception and salesmanship. You are correct that this is a difficult issue to deal with. However, I think it’s also important to note that the financial services industry has done most everything possible to keep it so and the public is the worse off for it.
Great topic; great blog post! As a Candidate for CFP Certification and a newly working Financial Planner, I have thought long and hard about this. And I know that inside industry speak is not important to my clients. There absolutely is a lot of confusion about the big, wide, and bad world of the financial services industry. And isn’t everyone offering advice? After reading Michael’s post, I am going to recommend to my partner that we nix the “Fee-only” messaging we have so prominently posted on our business cards, our company byline, and our web site. I think we will move to a “we work only for you” type of positioning. I’m also reminded of marketing professor Kotler’s point about the railroads vs the trucking industry. The name of the game was transportation, not railroads. So, maybe the name of the game is not “financial planning” but “financial security” or something more inclusive.
Johnny,
Thanks for sharing!
I think you’re definitely on a good track here. “We work only for you” is a much more client-friendly way to communicate the “fee-only fiduciary” message! It gets to the point, without the jargon!
-Michael
Michael,
The confusion of “fee-based” for investors is mostly due to the fact that fee and commission people have used fee-based for decades to try to get people to believe that they are professionally objective because they charge a fee for something. You say consumers are making a “finely sliced” distinction between “fee-only” and “fee based”. They’re not. There is a world of difference between selling commissioned products and managing investment portfolios without them. There is no way to rationalize professional objectivity when the only way you make a living is by selling somebody something. A simple explanation to consumers will answer all of their questions and deal with their concerns, and it’s always been that way.
David,
I don’t even see consensus around what these terms “fee-based” and “fee-only” even mean. Having interacted regularly with financial planners via FPA, the SFSP, and the AICPA PFP section, I have seen that the definition that NAPFA uses for these terms is not even consistent within the industry.
The average consumer doesn’t even understand that the terms “fee-only” and “fee-based” HAVE a different meaning until it’s explained to them. And the reality, as the research shows, is that they react so negatively to the “fee” terminology that in reality many of them probably never even give the planner a chance to explain it. They see “fee only” on the website, dislike fees, have a negative first impression, and move on without ever calling or contacting the advisor.
The point here is not that the difference between fees and commissions don’t matter. They do. The point is that specialized terminology like “fee-only” versus “fee-based” is a remarkably negative way to frame it for consumers. The data suggests that consumers hear “fee blah blah” and are so turned off by the “fee” part, they don’t even get to the explanation of why it matters.
If the point is “unbiased” or “objective” then we need to say THAT.
– Michael
Micheal,
While I hear from the financial media that the average consumer/investor is so much smarter today than in the past, this is proof positive that they are NOT that smart since, as you and surveys say, they don’t even know the difference between compensation methods.
Since the FPA is just a trade organization – not all financial planners – the sales-oriented fee-and-commission or commission-only people aren’t going to want to draw attention to the fact that they are mostly compensated based on their product sales, not money management or advisory services.
The average consumer needs a lot more education about the system before they can make intelligent decisions. WE GIVE IT TO THEM REGULARLY. The distinction of “fee-only” vs. “fee-based” isn’t a negative way to frame it. If the FPA and AICPA PFP aren’t bright enough to know how to define the terms, than it just means they are the ones at fault, not the words.
Fee-only is the only way to go, and it’s not at all hard to define its meaning and value. “Fiduciary” is just another positive way to convey its worth. If the consumer turns away before they get a true and accurate explanation, then they’re getting what they deserve, and their ignorance will cause them to pay the price.
David,
I’m sorry, but I simply can’t accept a “blame the consumer” mentality that says it’s all their fault for not understanding.
If they’re not understanding our words and messages, we need to accept responsibility for the weakness of our communication and find better words and messages and ways to reach them.
-Michael
Michael,
I didn’t say it was ALL the consumer’s fault. As I said, if the FPA and AICPA can’t explain things intelligently, then it is THEIR fault.
There’s no question that the industry needs to give clear and understandable explanations of it’s terms, but if the consumer sees the simple words “fee” or “fee-only”, as you mentioned, and it is an immediate turn-off, and they don’t bother to find out what the terms really mean, then whose fault is that? We can’t make consumers learn what they don’t want to, or think they have to, learn. Ego and ignorance are their enemies.
Yes, we can do better at consistently and correctly using the terms that describe compensation, responsibilties, procedures, benefits, etc., but after 40 years in the financial services industry, there is no question in my mind that MANY just don’t get it and never will, and their financial situations are living proof.
Michael,
It is admirable to desire for all advice to be given as a fiduciary, period. However it is also just not possible when conficts of interest are high.
This article demonstrates why
http://sds.hss.cmu.edu/media/pdfs/loewenstein/DirtOnComingClean.pdf
So not only do conflicts cause worse outcomes, but disclosure of the conflicts cause even worse outcomes.
In light of this, allowing “unbiased” and “objective” to be used by those providing services with the biggest disclosed conflicts of interest is abdicating responsibility by our profession.
Bill,
I never said that being conflicted and disclosing it is license to say you’re not conflicted.
The point is simply that if you ARE unconflicted, “fee only” is an extremely consumer UNfriendly way to explain it. It reminds consumers of things they don’t like and asks them to appreciate the industry jargon that we’re using, which is the antithesis of building a positive, trusting client relationship.
– Michael
Michael, I hear you, and just today we discussed whether to emphasize no-commission instead of fee-only.
However, I am still concerned that your article implies that objectivity and compensation method are not correlated. You said:
“…From the prospective client’s perspective, what matters in the end is not how you’re compensated,..”
And what the study I reference shows is that from the client’s perspective of results, how we’re compensated does indeed matter a lot.
Bill,
The point here is not about the correlation between objectivity and compensation. The point is the correlation between objectivity and good advice.
People care that they get good advice. If objectivity leads to better advice, then that’s good for the consumer, but in the end the consumer’s focus point is still good advice.
So if we really want to connect with consumers, we need less “fee only fiduciary” which is both jargon they don’t understand and says nothing about results, and more “We give better advice because it’s unbiased and unconflicted.” THAT is about better advice. That is what matters to consumers because it helps THEM. You might reach that point by BEING a fee only fiduciary, but that doesn’t mean you have to, or should, explain it that way.
I’m sure my doctor could give me a 15 minute organic chemistry lesson about why one drug is better than another, followed by a 30 minute lesson about different types of medical business models, but in the end I just want to know that: a) his advice is objective and trustworthy so that b) he can just tell me what to do. Spending 45 minutes talking over my head does nothing to enhance (a). In fact, that discussion undermines it, because I won’t trust a doctor who talks with big fancy words I don’t understand.
-Michael
Michael,
You do have very good points about perception. And I also like your discussion about charging separate fees for separate services. I guess what I’m wondering is as a profession, should we be more concerned about clients’ perceptions, or clients’ results?
And if you’ve read the study I linked to, I’m still unclear as to why you think being a fee only fiduciary says nothing about results. The study clearly shows that fewer or no conflicts of interests does indeed lead to better results.
Bill,
There’s a distinction between how we should be regulated, and how we should communicate our value to the public.
Every doctor takes the Hippocratic Oath, but the reality is that a doctor who volunteers that up front does not inspire trust. In fact, it’s the opposite. When someone starts a conversation with “trust me” that’s often a tip there’s something NOT to trust!
The research you cite makes a good case for the REGULATORY value of fee only fiduciary, but not as a communication tool for the public. We say “fee only fiduciary” and all they hear is “fee blah blah” because they don’t understand the jargon and the meaning. All they have is a word they don’t like (“fees”) and a bunch of blah blah jargon words they don’t understand.
As I stated in the blog title, it’s not that f
“fee only” and “fiduciary” are bad business or a bad way to deliver services to consumers. The communication , unfortunately, they’re bad marketing and poor communication.
And ironically, by doing a bad job marketing the benefits of fiduciary advice, we reach less people and actually slow the pace of change. We scare people away with our words before we have a chance to prove ourselves with results.
-Michael
I don’t think you take take results from this study as say that fee-only and fidicuiary shouldn’t be used. This study tested them as stand alone phrases. So what this tells me is that we need to speak the clients language not our industry language. I will still use both of these terms but I will be sure not over use them and expect them to stand on their own and have impact on their own. I think the more prominent phrases in marketing materials and website should be “commission free, objective, no conflicts of interest, we don’t sell products, your best interest not our own, I work for you not a company selling proprietary products. So of I use the terms fee-only and fudiciary, I might say for example, I am a fee-only fudiciary advisor. This means that I…. . Then I would have the majority of the messages in the client language with words that do prove to have impact like the phrased I mentioned above. I think you also need to leverage NAPFA client marketing and educational material on this topic. Educate your client and prospect base over time on the benefits and differences between fee-only, fee-based, and commission based. NAPFA offers lots of great brochures, guides, videos, and ther materials that can be used in your marketing materials, social media, newsletters, direct mail, and website. It takes is a consistent education of your prospects and client base on this topic and in a relatively short time they will be huge advocates of fudiciary fee-only advise nd they will fully understand the difference.