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Warning to Advisors: Potential Clients Still Don’t Trust You

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There are many researchers who cover the retirement planning space, but Financial Finesse has a unique set of data when it comes to retirement plan participants’ feelings and actual behavior. That knowledge should serve as both a warning to advisors, and an indication of the opportunity that exists for finding new clients and encouraging better saving and spending behavior among existing clients.

Financial Finesse is an education firm that is retained by employers to provide advice to participants in their company retirement plans; it provides that advice via experienced CFPs. In an interview with AdvisorOne on Feb. 24, Liz Davidson (left), the founder and president of Financial Finesse, noted several takeaways for advisors from the firm’s interactions with employees of retirement plans.

First, the financial crisis has seriously undermined the credibility of advisors. “When we started” tracking participant requests for help with their finances, Davidson reported, 10% of the employees calling Financial Finesse’s CFPs said they were interested in finding a planner; last year, that number fell to 2%. “There’s a lot of cynicism out there,” Davidson says. While she acknowledges that being less trusting can be a good thing, there is such a thing as an unhealthy skepticism as well that could keep consumers from being receptive to good advice, and advisors.

That’s the bad news. The good news for employers, employees and advisors—and for the country itself, for that matter—is that Financial Finesse’s research shows that workers save more in their 401(k) plans when they get more “touches” about the value of increasing their plan contributions. In other words, the more educated a worker is about saving for retirement, and the more that education is reinforced by multiple messages, the more that worker will save.

That education, however, must be seen as coming from a knowledgeable but also disinterested party. That is one reason why all of Financial Finesse’s CFPs are compensated solely by salary, and also why Davidson is insistent that her company is in the education business, not the advice business, despite acknowledging the business opportunities inherent in a system where plan participants are getting professional education and might well want to take the next step to getting and acting on professional advice.

That provides another opportunity for advisors, Davidson quietly points out: while many of those plan participants might not meet your minimums, the more highly paid executives of those companies might well do so, not to mention the business owners who are plan sponsors. She says that plan advisors are “more open to third-party educational help” for the rank-and-file participant so the advisors can “focus on those with the assets.”

Plan sponsors make another mistake, she suggests. “There’s so much focus on plan design and the performance of the funds within the plan,” she laments, while the

“two biggest issues: how much are participants actually saving, and where are they allocating those funds” get short shrift. “There’s a myopic focus on short-term results,” rather than on maximizing deferrals and picking investing options that fit into an overall asset allocation. She suggests that such a misplaced emphasis doesn’t quite fit into the fiduciary obligation of plan sponsors and advisors to retirement plans.

On the other hand, Financial Finesse’s experience with participants shows a growing sophistication among plan participants, and perhaps a change in Americans’ savings habits. “I’m feeling proud of the American consumer,” says Davidson, referring to the higher savings rate that occurred during the crisis but which has remained high during the recovery, which other observers have noted often is not the case when the economy revives.

”It’s becoming cool to be frugal,” she says, noting the success of reality shows about couponing and the soaring popularity of an online app like GroupOn, which provides discounts to members on everything from restaurants to spas. “We’re not as embarrassed any more about saving money and looking for discounts,” she says.

Advisors who push their ability to produce short-term returns, she concludes, won’t find as receptive an audience in this atmosphere. But will it last? Davidson thinks that younger consumers, and younger employees in retirement plans, present the greatest chance to sustain this more frugal, higher savings approach.