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Financial Planning > Behavioral Finance

To Justify the Value of Financial Planning to Clients, Consider Saliency

By Michael E. Kitces

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Do you want to be more valued by your clients for the financial planning work you perform for them? If so, you have to consider the issue of saliency (we’ll get to its formal definition below).

In an ever-busy world, our brains can only keep track of and manage a limited amount of information; the rest, that’s less salient, just slips by. In the best of circumstances, we make good choices about what to pay attention to, and use that information to make the best decisions, but in reality the things that are most salient are not always the best bits of information. On the one hand, this leads to a lot of bad decisions. On the other hand, it also creates an opportunity to help shape people’s decisions by making key information more or less salient.

In fact, planners have increasingly been using this technique in recent years, engaging in the practice of charging separate financial planning fees, in an effort to make the financial planning more salient, assuming that “clients value [more] what they pay for” and may better appreciate all the behind-the-scenes ‘shadow work’ done on their behalf if they write a separate check.

Yet a deeper look reveals this is a rather crude way of justifying the financial planning value proposition. Drawing attention to the price forces people to consider what they’re getting for their money, and therefore to think about its value, but focusing on fees is not always a positive.

After all, in most industries charging separately for fees is a nuisance and a negative. It’s actually designed to discourage people from utilizing the service, from overdraft fees to baggage fees to insurance copayments and deductibles. Is it really a good idea to risk putting clients into the same mindset about their financial planning ‘fees’ too?

Instead, if the true goal is to make the value of financial planning more salient, then perhaps the focus would be better directed towards that goal itself. For instance, by creating more/better deliverables for the client beyond just the financial plan itself, perhaps including a mind map of their financial picture or a personal organizer for their financial files.

Alternatively, financial planning value might be emphasized by making a conscious effort to always direct the focus in client meetings towards the planning, with a meeting agenda that explicitly highlights the financial planning “check-in” and ongoing action items.

Some firms even provide clients with a list of the financial planning ‘shadow work’ tasks (printed directly from the CRM) being done on their behalf. Ultimately, the goal shouldn’t actually be to make financial planning fees and costs more salient, but to minimize the saliency of the costs and maximize the saliency of the value itself.

Understanding Saliency

The word salient means to be strikingly conspicuous or prominent; in the context of our brains, where there is so much information to continuously take in and process, salience is important as a marker of whether something is even noticed at all. In other words, information and events that are not salient literally are not consciously noticed, which in turn impacts how (or whether) they impact us at all.

In “Thinking, Fast and Slow” Daniel Kahneman discusses several instances where saliency has an impact on how we think and make decisions. A salient event that attracts your attention becomes more easily retrieved from memory, which leads us to overestimate the frequency of the event.

For instance, the popularity of the movie Jaws over the past 30 years (and more recently, the SyFy movie Sharknado) made the risk of shark attacks highly salient, causing people to grossly overestimate the risk of being killed by a shark (in fact, being killed by a lightning strike, a falling coconut, a falling vending machine or falling out of bed are each more likely than a fatal shark attack).

This effect is called the availability heuristic. Similarly, our strong internal desire to make sense of the world leads us to create explanatory stories for random events, and recent salient events often get unwittingly incorporated into the narrative we use to explain the situation. This tendency is known as the narrative fallacy, and was popularized in Nassim Taleb’s “The Black Swan”, which, ironically, made the narrative fallacy itself more salient.

Kahneman’s research highlights that saliency is also important because only a small number of decisions we make are actually influenced by the cognitive, logical, rational, higher-thinking portion of the brain, or what he calls ‘slow’ thinking or System 2. By contrast, the majority of decisions are actually made by the fast, emotional, reactionary (System 1) part of the brain. While some aspects of saliency impact the fast part of the brain. That is often the case with the aforementioned availability heuristic; making something salient can also force it into the ‘slow’ part of the brain to be fully considered.

For instance, a recent research study on saliency found that people who pay for toll booths using E-Z Pass (automated, electronic toll payments) are less sensitive to toll increases than those who pay the tolls in cash. As it turns out, the act of making the payment and physically handing over the money makes the cost more salient, which in turn makes those affected more cognizant about what they’re paying.

Those who paid by cash were more likely to know what the toll amounts were, and the researcher found that the average toll rate on cash-based toll roads rises more slowly than for electronic toll roads where the costs are less salient. In other words, when voters aren’t thinking about the payments they make, they’re less likely to object to toll increases.

A similar phenomenon is observed with spending behaviors tied to cash versus credit cards; the cost of goods is often less salient when spending on credit, due to the decoupling between the time of purchase and the time of payment, and accordingly the less salient costs often unwittingly lead to higher levels of spending (sometimes problematically so!).

In other words, making the cost more salient forces us to think about it more, which inevitably leads us to be at least somewhat more cost-conscious and at least somewhat less likely to just accept and pay the price of what’s set before us.

In the second part of the post, I’ll discuss how to make the value of financial planning more salient.

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