In today’s world, the importance of trust cannot be overstated. Whether for self-driving automobiles or financial advisory relationships, people need to trust in a good, service, or fellow human being in order to secure their physical or financial well-being. And while I don’t believe the importance of trust is overlooked by many people, I do believe it is more complicated than most people think.

Today’s advice industry has moved meaningfully toward fee-based compensation, and in this environment, attracting new clients and retaining existing clients are paramount. The good news is that trust appears to be a key component—perhaps the key component—for improving both referrals and client retention. Our recently released research, Trust and financial advice, part of our Advised investor insights™ series, clearly illustrates the relationship between these important factors for an advisory practice’s prosperity.1 Also, it provides an additional insight that might be easily overlooked: It’s not any level of trust but a high level of trust that matters to clients. As you can see in the charts below, clients who have high levels of trust in their advisors are far more likely to provide referrals or stay with their advisors than clients who have even a moderate level of trust.

Trust is the key to referrals and retention

Sources: Vanguard and Chadwick Martin Bailey, a market strategy firm.

Intuitively, this seems to make sense. After all, would you allow yourself or your family to ride in a self-driving car if you sort of trusted its ability to take you where you needed to go safely? So if gaining a high level of trust is the goal, what can you do?

 

Trust is complicated

It is important to recognize that trust has more than one definition. I conducted an informal poll of friends, family, and advisors for a little while, asking them, “How would you define trust?” Completely unscientific, I know, but interesting nonetheless. Typically, people defined it in one of two ways. Many defined it from an ethical perspective: “I trust that a person will act in my best interest.” Others tended to define it based on a functional viewpoint: “I trust that people will do what they say they would do.” But hardly anyone’s initial definition was based on emotions, i.e., how trust made the person feel. Again, our data show why this is so important. When asked which definition of trust mattered the most to them, more than half of the advised investors surveyed said it was the emotional one (see chart below). So while the emotional definition was the one least frequently mentioned in my informal poll, it seemed to be the one that mattered the most to people based on our research survey. Interesting.

Trust has several dimensions

Sources: Vanguard and Chadwick Martin Bailey, a market strategy firm.

 

People, not portfolios

You can do other things—simple things—to build higher levels of trust and signal your commitment to and your concern for your clients:

  • “Hey, how are you doing?” calls—how often do you call clients just to see how they’re doing, with no portfolio-related objective in mind? Treat them as people, not portfolios.
  • Instead of asking, “How are the kids?” ask, “How are Janie and Jimmy?” Essentially the same question but with a more personal touch.

While I don’t believe investors would have any trust in someone they believe doesn’t act in their best interest or is unreliable, I also believe the secret to closing the gap between high trust and moderate trust lies in advisors’ better understanding the impact of emotional trust. Making sure your clients feel valued and taken care of can go a long way toward closing the trust gap. As mentioned above, while trust is the gateway to client referrals and retention, high trust is likely key for success.

1 Anna Madamba and Stephen P. Utkus, 2017. Trust and financial advice. Valley Forge, Pa.: The Vanguard Group.

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