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Retirement Income Reporter: Building Trust

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The Harris Poll organization has a June 2009 survey showing that just one quarter of Americans say banks are honest and trustworthy. Only 13 percent of respondents say the same thing about financial planning firms. The lowest ranked of all are Wall Street and credit card companies, at 4 percent each. The sample reflects the entire American population. This looks scary but it always pays to figure out the fine print.

This poll’s methodology does not enable estimates of theoretical sampling error. As a result, readers may have a trust problem of their own with those who would use these results, because such may not reflect what is happening to the population of investors and clients. Not all Americans are investors. Buyer of statistics, beware.

To discuss trust, let’s start with dictionary sources. Definitions of “trust” include reliance on the integrity and competence of a person, and confident expectation of a result. Such definitions suggest trust involves honest and good intentions, technical competence and an expectation of specific outcomes.

Trust seems to be a mental state, perhaps a moral choice, that we cannot observe or measure directly. Trust is not an objective fact that can be presented outwardly to the client. Trust is a psychological pattern that must be observed and inferred over time. No wonder, explicit and forward declarations of trustworthiness often fail to make the expected impression. The soundness of placing your trust in somebody is measured after it is given. It is also measured indirectly when the expected outcomes materialize or not. It takes time to grant trust. It takes even more time to validate the decision.

Trust can develop more easily when the broader environment is structured and ordered. Francis Fukuyama has written about “high-trust” cultures, where people readily form voluntary connections; and “low-trust” cultures, where they do not. I was not surprised to read that France is low-trust while the U.S. is high-trust. France has a two-millennia-long tradition of “peasants run by their betters.” I know because I was raised there. America has a two-centuries-long tradition of self-reliant pioneers. I am glad I came to America.

Trust grows best when there are rules that apply to all. Trust grows when the playing field is level and is expected to stay level. Bending the rules for cronies kills trust. Playing favorites kills trust. Reading the news in this context, trust problems may not be limited to the financial industry. In the current economic crisis, some people and organizations seem to be getting better treatment than others. Did you get your bailout or are you paying for somebody else’s bailout?

Types of Interactions

In 2000, I bought a book called “The Trusted Advisor” by David Maister, Charles Green and Robert Galford (Free Press). Looking at it again reinforces that personal relationships of trust are hard to create and maintain over time. Expanding on ideas in the book, I note that it is possible that many Americans do not trust the financial industry much because they do not really have to trust the industry, at least most of the time. Not all clients seek relationships of trust with the financial industry, though many may be interested in them.

Clients can have several levels of interactions with the financial industry. Most of these interactions are not primarily dependent on establishing a personal relationship of trust with a representative of the financial industry. Interactions include buying off-the-shelf products, purchasing routine services, satisfying a specific need with a vendor of mass-customized solutions, solving daily issues with custom-based providers of ideas and insights, and solving vital problems with trust-based relationships.

Opening a checking account, a credit card or a mutual fund are off-the-shelf purchases. These can be performed without establishing a personal relationship of trust with the company’s representative, even though customers may “trust” the brand.

Withdrawing weekly cash from the bank has become such a routine service that ATM machines have mostly replaced the human bank tellers. Credit card companies provide automated phone systems to check balances, last payment, etc. Investment companies provide on-line access to make transactions, check their status and look at personal statements on a daily basis. None of these services require the establishment of a trust relationship with a representative of the matching financial institution.

Mass-customized software calculators answer a variety of need-based questions for personal budgeting, tax estimating, investment management and retirement planning. None of these solutions requires having a trust relationship with a provider. Actually, we may derive more comfort by comparing answers from multiple, unbranded sources.

Accounting, tax, banking, lending, insurance and investment specialists have at least two types of relationships with clients. One is focused on providing professional ideas and insights but falls short of a personal trust relationship. This relationship is focused on the technical competency of the specialist and does not need to involve the level of emotional depth and personal knowledge that comes with a trust relationship.

The other type of specialized relationship with clients is a trust relationship. This is an expensive relationship to build. It takes time and effort for both parties to reach the required and mutual level of emotional depth and personal knowledge. Trust relationships go beyond providing ideas and insights. These relationships are long-lasting and high-maintenance because they are necessary to create safe-haven solutions to unique, multidimensional and hard issues.

Know the Mission

As I listen to a wide range of people and institutions with customer-facing relationships, I have become accustomed to their having difficulty answering this seemingly simple question: “What does your typical representative do?”

The problem is not a shortage of answers. It is the opposite. It is hearing too many answers, not all of them consistent with one another and not one of them more constitutionally authoritative than another. The typical customer-facing, trust-seeking representative may be involved in the provision of specialized advice from a discipline (including accounting, tax, legal, financial planning, investment management, insurance, etc.) — or aim for the most complete integration across all disciplines.

The representative may have a focused practice based on the clients that can afford the cost — or provide balanced services beyond the most profitable clients.

The practice may offer emotional confidence and psychological peace of mind — or a clinical presentation of the providers’ limits and the client’s own responsibility.

It may involve the highest of professional standards — or the expression of deep doubts about the very existence of a profession.

On the accumulation side, these varied answers typically lead to the same place: assets under management. The story is: We do this, we do that, but in the end you will receive asset allocation among risky investment vehicles. No matter the specifics of the process, you get to the same place. If this the deal, on what basis can you place your trust in one differentiated pitch, product, process or professional rather than in another?

At RIIA, we focus on answering such questions for the emerging retirement income focused practices. Remember that definitions of trust include honest and good intentions, technical competence and an expectation of specific outcomes. We will assume that all professionals qualify on the first two ideas: good intentions and technical competence. Where accumulation differs most clearly from retirement is on the third measure: specific outcomes.

Accumulation outcomes are primarily about forming return expectations that may or may not materialize. Retirement outcomes are about reliable monthly payments. As the financial industry moves from accumulation toward retirement income, a key to building trust will be stating explicitly the retirement income professional’s primary mission, which we at RIIA encapsulate thus: “First build a floor and then expose to upside.”


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