Trust and financial advice

By hiring an adviser, an investor takes a leap of faith. He or she trusts that the adviser will provide proper guidance and oversight of their finances.

Our research found that being the client's advocate and acting in his or her best interest are the top two factors that determine overall trust.

Once, trust in financial institutions – and in financial advisers – was widely taken for granted. But the global financial crisis of 2008–2009 eroded many investors' confidence in the people and organisations charged with managing money.

The bond of trust you share with your clients is the cornerstone of your relationship, and of your business. Recent Vanguard research examines the role of trust in the adviser-client relationship and the factors that can strengthen or weaken it.

A brief summary follows, or you can read the report in its entirety.

The components of trust

In 2015 and 2016, Vanguard surveyed nearly 4,000 advised investors in the United States to gain insight into how trust is built between advisers and clients.

We identified three components of trust – functional, emotional and ethical. Although the emotional aspect was generally regarded as most important each component contributes to the overall assessment of an adviser's trustworthiness and a failure in any component can compromise trust.

Functional attributes

  • Relevant financial industry qualifications.
  • Awareness of trends in the markets.
  • Knowing how to conceive, execute and reassess a financial plan.

Emotional attributes

  • Ability to see things from clients' perspectives.
  • Ability to relate to or make a connection with clients.
  • Giving clients a sense of relief and security.
  • Serving as clients' advocate, pursuing their goals almost as if they were his or her own.

Ethical attributes

  • Possessing integrity.
  • Having no conflicts of interest or ulterior motives.
  • Acting in clients' interests at all times.
  • Compensated fairly.

Source: Vanguard. Note:1

What drives trust – and what breaks it

Putting the components of trust into effect requires knowing the specific qualities or behaviours associated with each type of trust.

Our research found that being the client's advocate and acting in his or her best interest are the top two factors that determine overall trust. Each was almost twice as influential as the third identified factor – having an adviser who "is someone I can relate to." Even seemingly critical attributes such as "no conflict of interest" and "does what he/she says he/she will" scored lower in driving adviser trustworthiness.

About one-quarter of the respondents in our study had had an experience that undermined their trust in their financial adviser (either their current adviser or a previous one).

There may be multiple reasons for an investor to distrust an adviser. The reasons most commonly cited relate to investment performance and neglecting the relationship. Additional reasons given included other emotional and ethical aspects of the relationship.

Reasons for broken trust (multiple responses allowed):
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%

Source: Vanguard. Note:1

Building and sustaining trust

Financial advisers can employ a variety of approaches to manage trust proactively. These can involve standards of ethical and fiduciary conduct, the pricing and quality of products and services, types of compensation arrangements, and a focus on elements of emotional, ethical and functional trust embedded in their marketing and client experience.

It's not enough for financial advisers simply to do what they are hired to do. An advisory relationship needs to be continuously nurtured. Being the client's advocate and acting in his or her best interest top the list of attributes that are central to building trust.

Trust is associated with client loyalty and positive outcomes for the advisory business. It's clear, therefore, that advisers should seek to manage trust proactively.

Learn more – and take action

You’ll find much more information on the importance of trust in the adviser-client relationship in our report. Download the full report at www.vanguard.co.uk/documents/adv/literature/trust-and-financial-advice.pdf

If you’d like to discover tools and techniques for building trust and creating opportunity in adviser-client relationships, register your interest for our 2019 workshops at www.vanguard.co.uk/adviser/adv/campaign/advantage-of-advice.jsp

  1. These lists are not all-inclusive. For a full list of trust attributes, read our research at www.vanguard.co.uk/documents/adv/literature/trust-and-financial-advice.pdf

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This document is directed at professional investors and should not be distributed to, or relied upon by, retail investors.

This document is designed for use by, and is directed only at persons resident in the UK.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.