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What Stops People From Getting Financial Advice?

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New research uncovers important psychological barriers, and some simple fixes

Blue and Yellow piggy banks playing on seesaw. Yellow piggy bank and its coins in mid-air.

When we talk about the benefits of using financial advisors, we usually talk about the monetary upsides. Larger retirement funds. Lower tax hits. Better insurance options. But anyone who has used a competent financial professional knows there are psychological benefits as well.

Chief among them: less stress about reaching financial goals.

But what drives people to hire an advisor? And what stops them? Most research in this area focuses on external influences. How close one is to retirement, for example, or the impact of major life events such as marriage or having children.

Yet these things aren’t under the control of a financial planner. “Many happen randomly and they aren’t something we can influence,” says Lynnette Purda, RBC Fellow of Finance at Smith School of Business.

Purda and Laurence Ashworth, Distinguished Faculty Fellow of Marketing at Smith, wanted to better understand what could be influenced. So, they set out to explore the internal psychological factors that drive the when and how of personal finance. If they could identify these factors, they could learn how to encourage people to seek financial advice.

Spoiler alert: Not only did they identify certain factors, they figured out that simple changes to how financial professionals are described (and how their services are explained) can raise people’s perceptions of working with an advisor.

The results of their research were published in a paper for FP Canada, a national professional body for the financial planning industry, called “Identifying and Removing Psychological Barriers to Financial Advisor Use.”

Psychological barriers

Through a series of interviews and surveys with 430 participants, Purda and Ashworth discovered that two internal factors strongly influence financial advisor use. One is attitude. How positive does a person feel about financial advisors? The other, “financial advice seeking self-efficacy” (FASSE), is a term Purda and Ashworth coined to refer to people’s belief that they are capable of successfully working with a financial professional.

Typically, about 20 to 30 per cent of people use financial advisors. In their study, Purda and Ashworth found that number dropped to 10 per cent when participants had an unfavourable attitude of working with one. A favourable attitude but low FASSE lifted advisor uptake to 18 per cent. When both attitude and FASSE were high, advisor adoption jumped to 44 per cent.

Purda and Ashworth knew that if they could figure out which psychological traits influence both attitude and FASSE—and change them in a beneficial way—it could potentially promote advisor use. Through their research, they found five such traits: the perceived cost of advisors; perceptions of advisors’ ulterior motives; privacy concerns; flexibility of the financial plan; and risk aversion. So if, for example, concern over cost was reduced, attitude and FASSE would both theoretically go up, and so would advisor uptake.

What am I buying?

The final step in Purda and Ashworth’s study, then, was to see whether these traits could be changed through a few simple interventions. They did this by running several experiments with a group of 855 participants. They investigated the impact of providing information that highlights the benefits of professional financial services. And they studied the effect of advisor fee structures.

Purda and Ashworth’s key finding was that when information about the professional credentials of the advisor (and the financial services offered) was provided, attitude and FASSE went up. Giving this information helped remove barriers to obtaining financial advice.

This makes intuitive sense, says Purda, as the research found that people are unfamiliar with the titles used by financial professionals. Many didn’t feel confident that they understood what financial advisors actually do. “If you were to buy a product, say a television or a computer, you would want to know the specifications of it—what are its components and what it can do,” Purda explains. “You can think about buying financial advice and assistance in the same way. People need to know what they are buying.”

With financial advice, it’s important to remember that the product isn’t bonds, stocks or other investments. It’s the ability to map out realistic ways to achieve financial security and goals, says Purda. It’s things like budgeting, planning for retirement or paying down debt. And like buying a computer from a trusted company, consumers want to know they are buying financial advice from a trusted professional.

Of cost and confidence

One of Purda and Ashworth’s most interesting findings is around the fees that financial planners charge their clients. Discussing these fees actually reduced participants’ desire to work with a financial professional. This held true no matter the fee structure—hourly, commission, assets under management or flat fee (in the study, the dollar value of fees was the same in each case).

“It still comes down to the value proposition and uncertainty on the consumers’ part that they don’t understand what they are getting in exchange for these fees,” says Purda. “To me, the takeaway is that how much something costs or how you pay for it becomes irrelevant if you don’t know what you are buying.”

People must not only have confidence in the financial advice profession overall, says Purda, but that they can successfully work with a financial professional. “People are so completely overwhelmed by different designations and sources of advice that they freeze rather than choose someone.”

At every touch point with potential clients, financial advisors need to provide objective information on industry qualifications, standards of practice and ethical obligations, says Purda. “If we do this consistently, individuals become more confident in knowing what to look for, and hopefully we build trust in financial professionals.”