The Cost of Trust

Daniel YergerFinancial Planning Leave a Comment

During my time in the Army Reserve, I had a job at IBM working in various roles in assisting projects relating to training and transferring services for various client companies to IBM. At one point, I went through the training for the service desk for a Department of Defense contract. The trainer, a woman named Cady, explained “the magic black box” concept to me at that time, which I will here relate to you: When you call a service desk for help, the caller should experience a magic black box. They call the service desk with a need, and out the other side of that call pops an answer to the need. How the answer was come to isn’t relevant to the caller, nor should they be forced to engage any more than is necessary in arriving at the solution to the problem. Ultimately, their problem should go in one end of the magic box and out should pop the solution.

The metaphor of the magic black box seems relevant today as I aim to share the foundation of my doctoral dissertation concept with you: The magic black box of financial planning, and more importantly, the cost of trust.

The Black Box of Financial Planning

An early trademark of a financial planner is the temptation to over-explain. “We arrived at this number, a very important number, by blah blah blah.” The lesson that every financial planner learns early on, is that “the numbers are never convincing on their own.” I have had a client tell me, pointedly and in writing, that they didn’t see the value of financial planning after having presented a plan model that would increase their lifetime family wealth by over ninety million dollars. The number was enormous, even unimaginable to some of us, and yet this client was not impressed. Not because the number wasn’t possible, but because he simply did not trust the magic black box of financial planning.

And that’s fair. It is fair to be skeptical. It is fair to ask questions and want to better understand at how an answer or a set of answers was arrived at. But despite the temptation to dig for more answers, one must ask one’s self: Are we capable of actually following the answer? Will our deeper understanding help us better accomplish what the answer has told us? Consider a different example from financial planning: Would grilling a neurosurgeon about the process of a brain surgery or a rocket scientist about how a space shuttle will get into space, actually improve the potential outcome of the surgery or shuttle flight? Or do you ultimately have to trust that they know what they’re doing?

The same element of trust comes into financial planning. The average initial financial plan takes around twenty hours to complete, and the first year of a financial planning engagement often takes upwards of thirty hours. Add to this the fact that this task is not completed by ditch diggers (bless them) but by highly educated professionals; compounded by this is the fact that even the benighted CFP® Certification, widely considered the table-stakes to be a qualified practitioner of financial planning, only scratches the surface of complex financial planning topics and issues. The result of course then is that financial planning is both complicated and expensive. Therein comes the cost of trust.

Is Trust Given or Earned?

A common point of dialogue in tense relationship-driven drama films is the idea that “trust is earned.” Yet, what does it take to earn trust? For example, as a 6-year member of a Business Networking International (BNI) chapter, I point out to new members regularly that they need to jump in with both feet. “Being a member of the chapter is the starting point. You still have to build relationships with your fellow chapter members.” While the chapter performs due diligence to ensure that people joining it are of an acceptable quality, it still takes months if not years to build the relationships to the point that they become consistently fruitful. But, doing so comes at a cost. Weekly two-hour meetings, plus weekly one-to-one meetings with other members of the chapter, plus social events, and so on. It’s not impossible that someone may need to spend anywhere from fifty to two hundred hours building trust with someone. This is, of course, a problem.

Today, most of our clients come to us via referral by other professionals and clients, or by finding us through online searches. Some trust is built up already by those referred to us because they already trust in that professional, friend, or family member that has referred us. But those finding us online are put in a tougher spot: they’ve googled “Financial Planner” or “CFP in Longmont” or some such, and have found that we’re “the only game in town” as far as fee-only financial planning firms offering financial planning go. Thus, in turn, they then must ask more questions and have longer conversations with us initially to build trust in our services. Yet, this presents a problem: The cost of time.

 Think about how much time you’ve ever spent with your doctor. I mean really spent. Five to fifteen-minute intervals, right? Seldom, if ever, have you spent half an hour or an hour with them. Certainly not just to get to know them, almost always in a context in which you have already been seen by members of their staff, had measurements taken, and are already likely in a position to immediately start receiving diagnosis and medical advice or prescriptions. Simply put, you place de facto automatic trust in your doctor to make the right decisions regarding your health, and only when presented with a reason to lose trust, do you question the relationship or expect to perform more due diligence. Yet, such similar trust is not present in engagement with financial professionals.

The Cost of Trust

The primary problem with the cost of building trust with a financial planner is the asymmetrical risk it presents. On one hand, it might behoove a consumer to want to spend ten, twenty, or even thirty hours getting to know a financial planner before entrusting them to build a financial plan or manage their life savings. Yet, this isn’t practical on the financial planner’s part or the consumer’s part; while a brand new financial planner may have the time to give away freely to win a new client, an experienced financial planner’s time for such a commitment could be worth thousands and even tens of thousands of dollars. In turn, even the client’s time comes at a cost. For example, a lawyer attempting to build trust with a financial planner before hiring them might be spending several hundred dollars an hour of their own billable time building trust before making a commitment.

The simple fact is that it’s not feasible from a practical standpoint that a consumer attempt to build adequate trust with a financial planner, and ultimately, while they may interview several financial planners and shop around, they must come to a decision with imperfect information, making the decision to trust the financial planner to give them guidance, help them make investments, shore up their risk management strategy, and so on. The risk is asymmetrical in nature because the financial planner knows up front, secretly, whether they are trustworthy or not; the consumer does not. From a personal standpoint as a financial planner, observing a potential client do due diligence upon me and MY Wealth Planners is always an understandable but slightly amusing activity. After all, I know that I have not and never will steal from my clients, nor would I create a culture or tolerate behavior in which we gave clients recommendations that weren’t in their best interest. Simply put, we know we can be trusted, but the potential clients who come to us do not, and thus we must entertain reasonable questions about how we’re paid, our conflicts of interest, and so on. Much as we’d love to  hold up a sign and shout “YOU CAN TRUST US!” It’s not enough for a discerning consumer, nor should it be.

How Can Consumers Build Trust Affordably?

The promise of the magic black box of financial planning is this: Insert money into the box, services are performed within the box, and better financial outcomes come out. This is more important than in most service magic black boxes, as the buyer of financial planning is making a conscious choice to worsen their financial position initially (paying the financial planner) on the promise or expectation that they will be better for it. This differs from almost every other form of service, in which money is exchanged for healthcare, a meal, construction, or some other form of tangible good, service, or entertainment. Functionally, there is no way around this issue, the only thing that a consumer can do is be better informed ahead of time to reduce the cost of trust when they make the decision to hire a financial planner.

They can familiarize themselves with the research literature on the value of comprehensive financial planning services:

They can further use that literature to compare what they expect to get (1.59% on the low side, 4.83% on the high side, 5% on the emotional side) with what the services of the financial planner will cost. For example, at MY Wealth Planners we provide a calculator that does all of this math for you. Other firms might list their prices publicly somewhere on their website. Even for firms that don’t, you can go to the SEC’s Investment Adviser Public Disclosure website and look up the firm you’re exploring having a financial planning relationship with. To do so:

  1. Go to the link above.
  2. Search for the firm; if the firm doesn’t come up, the advisor might be “doing business as” under a larger entity. To confirm this, search for the person you’re talking to and see what firm they’re affiliated with, then go to that firm’s page.
  3. Read the Part 3 Relationship summary, which is the first disclosure document you should receive from any firm that’s SEC-registered. Note that state-registered firms like MY Wealth Planners are not required to create a Relationship Summary document.
  4. Once you’ve reviewed the Part 3 Relationship Summary, review the Part 2 Brochures. These are meant to be “plain English” readable documents about services, fees, and conflicts of interest. You should pay special attention to items 4 and 5, which describe their services and the fees for their services. Item 6 may share some additional expense information. Past that, another key area to review is Item 9, which covers the disciplinary history of the firm, and finally items 11-15, which cover their ethics around investment management and custody of your money if they offer investment management services.

One note to consider is that not all firms are found on the Investment Advisers Public Disclosure website. This can be for one of two reasons: A) They are not an investment adviser, which often means they’re an insurance-based firm. Be very cautious with these firms, as you cannot pay them for advice, only to sell you products. As Maslow pointed out: If your only tool is a hammer, all problems will look like nails. B) It could mean that they are a family office or another similar form of small firm that is exempt from registration. Reason A is about a thousand times more common than Reason B, so be careful. Note also that the Investment Adviser Public Disclosure system can be used to verify that the financial planner you’re talking to is licensed, as well as reviews their disciplinary history or disclosure events, which can range from lawsuits to criminal charges. Again, as with the note about missing firms, if someone is not listed on the IAPD website, that is a big red flag that they are not able to offer you financial planning services, only to sell you products.

Finally, ask good questions and get answers in writing: There are a number of great resources for questions you could and should ask financial planners; be careful about following the “key” in those lists of questions, as they sometimes do reveal a bias from the author. For example, we reviewed the Zweig Questions last year, which are pretty good, but do have some bias against certain service models. Other good questions are from NAPFA (1 2 3 4), XY Planning Network, and the Financial Planning Association, and the CFP Board.

The Cost of Trust but Verify

Ultimately, if you work with a qualified financial planning professional, all the data says you’ll end out better on average. There is reason to be concerned about the “left tail” in which you end up working with one of the bad ones. Ultimately, that’s a risk that can never be mitigated when hiring any member of any profession. It never hurts to do as much due diligence as needed up front, but even more so, it doesn’t hurt to ensure you’re checking in over time. If a financial planner takes your money, helps you up front, and then is never to be heard from again, that kind of checkup might be exactly what you’re looking for, or it might be your worst nightmare. Ask questions about what ongoing service looks like and what you can expect from your financial planner; in turn, be sure you’re keeping an eye on your statements and other provided resources by the financial planner to ensure you’re getting what you thought you were paying for in the first place. If that’s to help accomplish specific goals, keep a tracker for your goals or ask your financial planner to provide one. If it was having your money managed, compare the return on your investments to the all-in fees you’re paying (both the financial planner’s fees and the cost of the products they’re using for you); there will be down years where the fees are greater than the return, but that shouldn’t be the ongoing norm. Finally, deep down in your gut, it never hurts to simply say: “Do I really trust this person with my financial future and the financial future of my family.” If yes, good, if no, it’s time to go back to trust-building or finding a new financial planner.

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