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Don’t Use the ‘F-Word’ With 401(k) Investors

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A report released Tuesday by Financial Engines found 87% of 401(k) investors think it’s at least somewhat important that a financial advisor be legally required to act in investors’ best interests.

However, Kelly O’Donnell, executive vice president of business operations and corporate marketing for Financial Engines, believes the concept of a fiduciary and what that means for their clients might be lost on investors.

Fewer than 70% of respondents said having an advisor who was legally required to act in the investor’s interest was “very important.”

“Many people believe that everyone is required to put their best interest first and that it’s the minimum standard when in fact it’s not,” O’Donnell told ThinkAdvisor on Tuesday. “As an industry, we need to do more education, more background and context for what does it mean to be a fiduciary — probably not using the word fiduciary — but [helping investors understand] the right questions to ask your advisor in terms of how they’re being paid, whether they receive commissions and make it more friendly to the investor.”

A legal requirement to act in investors’ best interest is important “whether you’re technology-driven or a human-based advisor,” she said.

She added that she’s seeing a “convergence of what technology can offer and what human beings can offer.”

“Despite a lot of things that we’ve seen in the defined contribution space — innovation with plan design with the automatics and innovation in investment products, whether that’s the ability to provide advice online or target-date funds, retirement income products, managed accounts — that even through all those innovations, you’re seeing people wanting to talk to an advisor,” she said.

For example, among target-date fund investors, 76% said that an advisor’s fiduciary status was “very important,” and 59% who didn’t have an advisor wanted to use one in the future.

“Here’s someone comfortable using an automated investment program, but they’re still very interested in talking with a human,” according to O’Donnell. “I think people think that if you’re in a target-date fund, you’re ‘set it and forget it.’ What this survey is saying is no, people still want to talk with someone, even with automated programs.”

Although interest in online investment platforms is high at 60%, just 23% of respondents said they preferred a DIY approach to investing. Over half of investors who didn’t work with an advisor were interested in doing so.

Furthermore, of the respondents who were interested in online advisory services, 68% said they wanted services that included access to an advisor.

O’Donnell said that most investors are “validators” and want someone to tell them the choices they’re making are the right ones.

“There’s a smaller percentage of people who are willing to do everything themselves, whether that’s online or walking in to a branch; they’re just more confident about using their own investing expertise. There’s also a percentage that wants to delegate completely,” she said.

The big segment, though, is the validators, the people who want a “combination of technology and advisors, where people are comfortable having an automated program or online advice take [their financial plan] to a certain point, but they want to know there’s a person behind that and that they can call somebody to get something explained.”

The user experience is an important part of advisors’ tech offerings, O’Donnell said. “So many things have changed our thinking about how a customer experience should be, things like Amazon and Uber,” she said. “Maybe people don’t want to have their whole investment strategy and put everything online, but they definitely want convenient access and to have a good experience so they can quickly get the answers.”

At a minimum, clients should be able to go online and check their account balance, but O’Donnell said some people also “like to play around with different calculators, different scenarios.”

However, cost was the biggest deterrent to working with an advisor. Forty-six percent of respondents said affordability was the biggest barrier to working with an advisor and 36% said they didn’t think they had enough assets to be attractive to an advisor.

There’s some confusion over what advisors can help them with, too, as 26% of respondents said that’s why they hadn’t started working with a financial professional.

“This is where I think the opportunity is to use technology to scale human advisors to be more productive and efficient, and able to reach more people even at lower account balances,” O’Donnell said. Being up-front about fees, fiduciary status, how the advisor gets paid and the services he or she offers is important.

She reiterated the importance of explaining all that in a way that doesn’t overwhelm the investor. “What we’ve found working with participants over 20 years, you have to do things in plain English. Estate planning can mean one thing to one person and another thing to another. You have to spell out what is the real value.”

— Check out How Changing These Words Can Help Advisors Hook Clients on ThinkAdvisor.


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