In “Help! I’m Investing My 401(k),” an article in the January 21, 2008 issue of Newsweek, Jane Bryant Quinn declared, “The evidence is in. Do-it-yourselfers need serious help in managing their 401(k)s. Left alone, [they] don’t achieve anywhere close to the market returns available.”
It is easy to understand why. Most individuals do not truly understand the basic principles of asset allocation, diversification, and non-correlation. They are often so afraid of making a mistake that they tend to invest too conservatively and they compound that by contributing too little. It is a vicious circle that will have serious repercussions when retirement age comes around.
So, professional investment advice is sorely needed. The problem, however, is determining the most efficient and effective means of delivering that advice. Let’s begin by looking at what does not work. Over the last 20 years, multiple forests have been destroyed in producing printed material designed to motivate and educate employees about investing for the future. Despite the mountains of paper, Mercer research suggests that 80 percent of participants are not actively engaged in managing their accounts.
With the huge growth of the internet, Web-based advice was widely viewed as the powerful new frontier of participant education. It was cost-effective, user-friendly, and cutting edge. For the most part, however, Web-based education and advisory services consist of digitally repackaged versions of the print materials that had already proved to be largely ignored by participants. And while the Web offerings offered interactivity and flash video, they have been ineffective in truly engaging people and prompting them to take action. Research conducted for Great Britain’s Financial Services Authority determined that the problem with Web-based advice is that most people view the internet as a source of general information “rather than a tool for delivering advice tailored to a consumer’s individual circumstances.” Interestingly, this same study suggested that Web-based advice could work if “there was some sort of parallel handholding or walkthrough — for example a person on the end of the phone” who could interpret and expand upon the presented information.
The fundamental drawback to printed and Web-based advice is the impersonality of it. One’s financial situation constitutes a highly private and oftentimes emotional aspect of one’s life. Accordingly, trust is a key element in selecting an advice partner and then acting on that advice; and it is difficult, if not impossible, to build a trusting relationship with print or digital sources. Which leads to the optimal means of providing advice: person to person.
There are two options for delivering person-to-person advice — either face-to-face or over the telephone (or a combination of the two).
At first blush, a face-to-face advisory relationship would seem to offer the best solution. It is highly focused and personalized. A strong interpersonal relationship can be established, and it is relatively easy for both parties to assess whether they are truly aligned and share a common understanding of goals, concerns, and issues. Perhaps most importantly, it provides the ideal environment from which to assess an individual’s total financial picture as opposed to only one component like a 401(k) plan. Unfortunately, face-to-face advice is impractical and prohibitively expensive for the mass market. There is also considerable anecdotal evidence that individuals are often too embarrassed or confused to meet face-to-face with an advisor.
A Telephone-Based Solution
Telephone-based advisory relationships may well offer the ideal solution for both advice givers and advice recipients. It maintains the personalized approach and holistic perspective, but eliminates many of the most common obstacles of face-to-face relationships. Indeed the previously cited Financial Services Authority study found that “many people chose telephone advice in preference to face-to-face advice, even when face-to-face advice was available.” The stated reasons were “convenience, immediacy, anonymity and non-judgmental nature of the service.” And while this particular aspect of the research was focused on telephone-based legal advice, it is hardly a stretch to believe the same results would apply to financial advice.
It is easy to understand why. Most simply, from a time commitment standpoint, a 15-minute telephone conference call would take 15 minutes, whereas a 15-minute meeting in an advisor’s office could take anywhere from a half hour to several hours, depending on travel time, mode of transportation, and similar factors. An August 2006 study by Britain’s Resolution Foundation considered various means of providing investment advice to low- and middle-income people. When comparing Web-based, face-to-face, and telephone advice, 90 percent of the respondents “indicated they would be willing to use a telephone service.” There is nothing to suggest that results with American workers would be markedly different.
The effectiveness of telephone-based advice can be expected to vary depending on the scope, depth, and duration of the client-advisor relationship. The most basic level of service might consist of a static asset allocation plan or buy-sell recommendations for a particular plan’s investment options. Upgrades to such service would include providing a perspective on a client’s non-retirement plan assets and ongoing monitoring of the client’s portfolio. A full-service relationship would take on fiduciary responsibility for the client’s portfolio and handle portfolio rebalancing and other transactions on a turnkey, discretionary basis.
A participant’s comfort level with any of these service levels will be highly dependent on the depth and continuity of his or her relationship with the advice-giver. Advice provided by a “service center” will likely not be received with as much confidence as advice provided by a sole, dedicated advisor. In addition, if you talk to someone different every time you call your advice provider you’re not likely to feel comfortable discussing topics like divorce, illness, and other personal issues that have a major impact on one’s financial security. Like everything else in life, the various ways of accessing investment advice involve trade-offs and each individual will have to assess their individual needs and preferred approach.
The Science of Hearing vs. Reading
Landmark research conducted by Carnegie Mellon University has found that people process and understand spoken and written language differently. Using functional magnetic resonance imaging (fMRI) technology to measure brain activity, the researchers discovered that the medium is indeed part of the message. “Listening to an audio book leaves a different set of memories than reading does,” said Professor Marcel Just, co-author of the report. “A newscast heard on the radio is processed differently from the same words read in a newspaper.”
The difference is due to the more temporal nature of the spoken word. Because each word is present for an instant and is then gone forever, the brain is forced to immediately categorize and store each word and phrase to then be able to reassemble them as a coherent sentence. “By contrast,” Just said, “written language provides an ‘external memory’ where information can be reread if necessary.”
While the study did not conclude that either method of delivering information was more effective, it does suggest that supplementing printed or digital material with a human voice can increase understanding and retention.
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What is critical in all of this is providing high-quality, easy-to-understand investment advice for the people who need it most — low- and middle-income workers who lack a financial cushion to fall back on should their investment decisions prove ineffective. These are the people who have been largely ignored by financial institutions and investment advisors because their fee-generating AUM is insufficient to justify personal attention. Telephone-based advice provides an opportunity to make smaller-size client accounts more attractive to advisors and to reduce the cost of such personalized service to a level that is affordable to workers at every income level. Think of it as “universal wealthcare” — one step toward ensuring that every working American can enjoy a long and comfortable retirement.
Phil Fragasso is the President of I-Pension LLC