A specialist in behavioural economics, Herman Brodie is the founding director of Prospecta Limited, a company who bring the most valuable insights of behavioural economics research to financial services professionals.
Herman’s book, written with Klaus Harnack, is called The Trust Mandate. Aimed at financial service providers, the book is an exploration of behavioural finance, triggered by the question: What makes a client choose one asset manager over another, when on paper, their performance is pretty much the same?
We recently had the pleasure of interviewing Herman. In this section of the interview, Herman explains why doctors command such high levels of trust; how advisers can learn from them; and what advisers can do to gain the trust of potential clients.
In the book you talk about doctors and how they tend to command high levels of trust. Why is that?
The thing about doctors is that they score pretty highly on both of the dimensions of trust we identify in the book; competence and benevolence. In a doctor-patient relationship, there is going to be risk or vulnerability, not only because the patient is sick, but also there’s an information asymmetry — the doctor knows more about medicine than the patient does.
Now, the good thing about doctors in comparison to financial services professionals is that when a patient goes to see a doctor, they don’t ask the doctor, you know, “Where did you study medicine?”, or ,”Which hospital did you train at?” or “How many people have you cured of a given pathology in the last three years and five years?” The doctor can concentrate a lot more on conveying benevolence because their competence is not usually under scrutiny. They can ask: “How are you? Where does it hurt? Let me help you.” And as a result, they are able to score much higher on that second, and more important, domain, benevolence.
There is a lot of research out there concerning the implications of that high trust relationship between patients and their doctors. To start with, a patient is more likely to go and seek care if they trust their doctor. They feel sick, they actually go to see the doctor. When they get to the doctor they are more likely to share the sort of personal information about their lifestyle or their symptoms, even the most embarrassing ones. Armed with that information, of course, the doctor is much more able to better diagnose those patients, which is obviously very important for health outcomes. The patient is also more likely to accept the treatment that the doctor recommends and follow that treatment over its full course, which is also linked to much better health outcomes for those patients. They’re also more likely to stay with the same doctor long term, which is good because a doctor gets to know them as they develop over time. And, finally, patients are more likely to recommend that doctor to others.
You see, a lot of the advantages accrue to the patient because the patient trusts the doctor, and so the doctor has, of course, a keen interest to be able to encourage the development of trust. The same thing applies in the relationship between financial service providers and their clients. The service provider has a keen interest to develop a high trust relationship because it has big advantages for the clients as well as for the service provider themselves.
So what can financial advisers learn from doctors about trust?
The people involved in the financial services industry are just not trusted. Not just financial advisers, but bankers, brokers, lawyers and fund managers — it doesn’t matter who you are really. Rarely are they trusted, but nonetheless they are perceived as broadly competent. People recognise that they’re educated, trained and certified, and so they have a high level of competence. What is missing for that trust evaluation, however, is the all important benevolence, which means people don’t actually believe that these people are working in their best interest. They think they’re working in their own selfish interest, and that’s the reason they’re not trusted.
I’m not quite sure why financial services professionals seem to be preoccupied with their competence. I mean, competence is important, of course, but why be preoccupied with it? By the time the client comes to see the financial service provider, they’re already convinced of their competence, so the competence battle has largely been won already. There’s actually no real need to continue to push competence down the throats of their clients, but nevertheless this is what they do. They speak about their competence in every colour of the rainbow, in very specific detail, but they convey very little benevolence.
The consequence of this is that for most clients, advisers all sound the same, pretty much. All financial service providers sound the same because they’re all talking about their competence, when actually what is needed is more benevolence. So, the space for competition on the benevolence domain is actually wide open. Hardly anybody is competing there, and yet it’s the most important factor in the evaluation, and, of course, there are no hurdles to stop them from competing. I mean no regulator is going to come along and say, “Be careful how you’re conveying benevolence to your clients,” and yet they still don’t do it.
So I’d suggest that what they should concentrate on is this: It’s worthwhile to sacrifice, so to speak, one unit of competence if you can win one unit of benevolence. So stop pushing your competence. In the final stages of that on-boarding process, you must demonstrate your benevolence — you have to show them that you are genuinely interested in their wellbeing in the widest possible sense, and you’re looking out for their future.
In the book you talk about the importance of showing warmth and how people tend to do business with people they like. What can advisers do to exude more warmth and to be more likeable?
We’ve looked at how trust is built at various stages in the relationship, for example, whether you’re looking at new relationships, established relationships, or mature ones. But remarkably, a lot of the heavy lifting that’s done in terms of establishing a trusting relationship is done right at the very first instance when relationships are new. And interestingly, one of the things that contributes enormously to trusting relationships is the mechanism of reciprocity. So basically, if I trust my client, it’s more likely that my client is going to trust me. So if I can demonstrate the trust that I have in my clients, for instance, by allowing myself to be vulnerable to them, then it’s more likely that they will reciprocate my gesture of trust with a gesture of trust of their own.
But it has to be into early stages of those relationships. So looking at, say, two companies who are getting involved in a joint venture; if one of those companies, before any contract has been signed, makes a significant material commitment to that relationship, trust tends to be higher in that joint venture. In that circumstance it’s very rare that the other partner reneges on this original agreement, even though contracts have not been signed.
Another example would be if I have a relationship with a client and they have to sign a contract to do business with me, but I provide a contract which allows them a lot of wiggle room. It allows them to escape if they want, and gives them the opportunity, if they so desire, to take advantage of me. The other person’s going to recognise this as a sign of my trust in them, and it’s a very difficult signal to ignore.
A third example is if I share some personal information about me in our very first encounter, very early in our relationship. Not some damning information or shameful information, just something that’s slightly embarrassing, something I wouldn’t want screamed from the rooftops, but it’s something that I’m happy to share just between you and me. If I share some personal information, I’m making myself vulnerable to the other person, and that person recognises that gesture of my trust in them, and is more likely to reciprocate with a gesture of trust of their own.
So this is something which is so simple, but it’s a very reliable indicator, and a good starting point for a future trusting relationship. Be vulnerable.
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