A growing number of successful advisors use "client segmentation strategies" in which communications and services are matched to personal life stages, attitudes or objectives. For example, you can select client segments such as pre-retirees, conservative investors or income-seekers. Once you have identified characteristics that drive clients' needs and values, you then can focus messages, target services, and build stronger relationships over time.

A growing segment of today's market is being ignored by almost all financial professionals. Virtually no research has profiled these investors, and few financial marketers are targeting them. Yet, their voices can be heard on blogs and talk radio shows, around the water-cooler at work, and in daily communications between advisors and clients

The segment comprises people who have gradually lost faith in the transparency, integrity and fairness of financial markets and systems. Because nobody has yet identified them with a tag that sticks, let's call them distrustful investors.

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I believe the same techniques you are using to target other client segments can work to expand dialogues and build relationships with distrustful investors. I also believe they can be a very attractive segment for building your practice.

This article shares ideas on how to identify distrustful investors and the messages and services you can offer them. It concludes with two powerful reasons why connecting with these people will make you a more successful advisor.

Defining the Distrustful

Evidence suggests that distrust of the financial system has become a motivating factor behind some investors' decisions and relationships:

  • According to a recent survey conducted by Associated Press-CNBC, 55% of respondents said the stock market is fair only to some investors. Among investors with portfolios worth $250,000 or more, 75% said the market is unfair to the little guy. The poll was conducted in August-September among 1,035 interviews with investors.

  • A 2009 survey conducted by Lightspeed Research found that 40% of consumers said their trust in financial institutions had weakened since the global financial crisis began.

  • According to a Forbes.com article called Why Clients Distrust Advisors, "85% of affluent investors surveyed by consulting firm Oechsli Institute last year that they are so dissatisfied with their current advisor they would consider changing."

However, very little data is available to help you identify distrustful clients and prospects. Here are a few anecdotal ideas based on personal experience and conversations:

  • Distrustful investors are not necessarily disaffected or alienated. They can be very involved in their communities, relationships and current events. They tend to be curious, pragmatic and independent-minded – people who stay abreast of current events, ask questions, and trust their own ears and eyes more than conventional wisdom.

  • Distrust is not always driven by emotions or based on personal experiences, such as negative financial relationships or investment losses. Distrustful investors can be analytical problem-solving people, the kind who enjoy solving crossword puzzles. You may find that their distrust has grown gradually over time as they have pieced together events and news accounts. As a result, their distrust can't easily be dismissed or shaken.

  • They may remain optimistic about their own personal ability to navigate the economic/financial system, even if they have doubts or worries about children or peers. They may regard distrust as an advantage, a financial defense mechanism that protects them from charlatans and mistakes.

  • They are skeptical of simple investment formulas that have worked "over time," and their decisions and concerns may be driven by more recent trends and events, such as mounting federal deficits or the Federal Reserve's quantitative easing (money-printing) program.

  • They appreciate advisors who listen to their concerns and help them put the puzzle pieces together. They don't appreciate advisors who treat distrust as an objection, to be answered and erased in a sales process.

Discussing the Puzzle Pieces

One of the best way to expand conversations with distrustful investors is to monitor recent stories they find concerning, separately or as part of the "big picture" they are trying to piece together. Here are a few examples:

  • The Flash Crash – Perhaps no other event has inspired more distrust of the U.S. stock market than the Flash Crash that began at 2:45 p.m. on 5/6/10 and caused a 7% decline in major U.S. stock market indexes over a 15-minute period. Some distrustful investors view the Flash Crash as a warning sign, indicating how dominant high-frequency computer trading has become and how much risk it has added to markets. Also, they are not convinced that the sudden shut-down in market liquidity triggered on May 6 has been addressed by regulators through new protections, such as circuit breakers. Like a rumbling volcano, the Flash Crash has continued to generate smaller aftershocks – brief, stomach-churning drops in individual stocks.

  • Municipal Bond Ratings – Since Enron, some investors have grown to distrust credit rating agencies. But is there a more recent reason they should? Investors who have closely followed California's state budget woes were surprised to see that both Moody's and Fitch raised the state's general obligation (GO) bond rating in April of this year. In Moody's case, the rating increased overnight by three full steps, from Baa1 to A1. The reason for this increase, amid the worse state-level fiscal crisis in modern U.S. history, actually had nothing to do with the state's credit. Rather, it was driven by politics.

Moody's said it had "recalibrated" virtually all of its long-term U.S. municipal ratings to a global rating scale. Looking at historical data, Moody's explained that municipal bonds had defaulted at a far lower rate than corporate bonds with the same ratings. Then, Moody's recalibrated ratings of a large part of its GO municipal bond universe – thousands of issuers and bonds – by an average of two steps higher. The change was influenced by political pressure because members of Congress believed that higher GO ratings would help state and local governments reduce the cost of bond funding, and thus better cope with budget crises. The recalibration occurred just as Congress was beginning to debate the Dodd-Frank Wall Street Financial Reform Act, including potentially stricter regulation of rating agencies.

At the same time, Fitch also recalibrated its GO ratings in a similar manner. Standard & Poor's did not recalibrate.

  • Foreclosure-Gate – The story of a mortgage servicing system run amuck has validated a key concern of distrustful investors – namely, that the financial system has fundamentally changed because big institutions have let profits trample sound business practices. Like everyone else, distrustful clients worry about the impact on the housing market and economy, if the foreclosure process bogs down in courts and regulatory red tape. Distrustful investors also view this story as a test of whether financial institutions will be accountable for fixing systematic failures that undermine public confidence.

  • AIG and Treasury – In October, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), reported that the U.S. Treasury had "failed to meet basic transparency standards" by using different methodologies to measure taxpayer losses in the bailout of AIG. He added that "Treasury's unfortunate insensitivity to the values of transparency has led it to engage in conduct that risks further damaging public trust in the Government." Previously the SIGTARP had criticized the Federal Reserve Bank of New York for failing to disclose the identities of counterparties it bailed out in rescuing AIG in 2008. Timothy Geithner led the New York Fed at that time, and he then became the Treasury Secretary responsible for the 2010 transparency failures alleged by the SIGTARP. For such reasons, Geithner has become the public figure that some distrustful investors find least credible.

  • Citigroup and Treasury – In January of 2009, Bloomberg filed an FOIA request to identify $301 billion of securities owned by Citigroup that the Treasury, FDIC and Federal Reserve agreed to guarantee. Bloomberg claims Treasury has continued to stonewall this request, and members of Congress have indicated that they do not even know the size or identity of toxic Citigroup assets taxpayers have shouldered. In August, the SIGTARP agreed to examine the Citigroup asset and deliver a report. More is here: www.bloomberg.com/apps/news?pid=newsarchive&sid=aiWZXE5RKSCc

  • Social Security Benefit Calculations – The future Social Security benefits of every working American are influenced by the annual calculation of an index called the Average Wage Index (AWI). This year, for the first time since the index' creation in 1951, SSA announced that the index change was negative and would result in a reduction of about 1.0% in prior credits earned by workers under the age of 60. The AWI figure originally released for 2009 (data is lagged by a year) was $40,934.93. Shortly thereafter, without public announcement or retraction, SSA revised the official 2009 AWI to $40,711.61, representing a reduction in credits of 1.5%. The apparent explanation for this change is the fact that SSA initially included two bogus tax returns, representing a $32.3 billion mistake, in the original AWI calculation. You can read the full story as reported by Ryan J. Donmoyer of Bloomberg here:

    • The story indicates that this important index is calculated only by SSA, without independent third-party verification of accuracy or methodology. Bloomberg has filed a Freedom of Information Act (FOIA) request.

  • 401(k)s and pensions - A big change of recent years has been the growing distrust of 401(k)s and pension plans. In its cover article of December 2008, Time magazine summed up the changing attitude by asking: "Should the 401(k) Be Killed?" The media has focused attention on two areas: 1) high and undisclosed costs that 401(k) participants pay; and 2) the 401(k) industry's headlong rush to offer target date funds, and the heavy losses that many participants absorbed in these funds in 2008 due to overly aggressive allocations.

    • Also, distrust keeps growing in the ability of public pension plans to meet future obligations. Last year, Wilshire Associates estimated that funded ratios were at 65% for state government pensions and 74% for local government pensions. Even these ratios are artificially high, because public pensions are still allowed to calculate future liabilities using an assumed investment return of 7-8%. (Private pensions must now use a blend of U.S. Treasury yields, a more conservative discount rate.)

  • Dodd-Frank – More than other clients, distrustful investors are interested in learning about the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed on July 21. The law contains provisions designed to restore trust, such as the creation of a new Consumer Financial Protection Bureau and restrictions on the "prop desk" trading of large banks. But it leaves other trust-related issues, such as a clean-up of credit ratings agencies and the resolution of Fannie Mae and Freddie Mac, largely in the hands of regulators.

    • Distrustful investors will be watching the emerging story of a "standard of care" for the delivery of personal financial advice. The next chapter in this story will be the release of a Fiduciary Duty Study by the SEC, on or before January 21, 2011. The SEC then may begin proposing new rules for standards of conduct by investment advisers and broker-dealers.

    Ideas for Distrustful Clients

    • Treat them the same — Treat distrustful clients the same as any other attractive segment. Discuss the stories, events and trends they find interesting and meaningful (including those listed above). Send them ideas that relate to what they believe and feel.

    • Don't try to convert them – Don't try to convince distrustful investors that they should have greater faith or confidence in financial markets or products. Instead, show them over time why they should trust you and your recommendations.

    • Avoid distrusted data – If clients no longer trust credit rating agencies, don't emphasize bond ratings. Emphasize your own analysis and recommendations, or the opinions of experts whom you recommend.

    • Distrust shouldn't lead to lack of action – At the end of the day, distrustful clients have the same real-world investment choices as others. So, remind them that distrust shouldn't lead to stuffing money in mattresses. Most distrustful investors are pragmatic and open-minded, and they will appreciate this guidance.

    • Personal control is attractive – Distrustful investors are able to participate in financial markets comfortably when they can increase personal control. For example, if they distrust 401(k)s, encourage them to transfer or roll over plan money to a personal IRA at the first opportunity. Some clients who don't trust their pensions may be able to transfer benefits to a personally owned annuity.

    • Havens remain attractive – Traditionally, gold and commodities have been havens for distrustful investors. But in the current environment you may have concerns that these markets are speculative and overbought. Fortunately, a few other havens remain attractive. They include equity in quality residential real estate, ownership of a personal business, and whole life insurance.

    • Change the formula – Distrustful investors believe the underlying fundamentals of financial markets have changed in ways that reduce opportunities or increase risks. They are wary of formulas that have worked well in the past, but not as well recently. For example, they learned in 2008 that asset allocation among different styles of stocks doesn't necessarily protect against steep losses. To convince them asset allocation still works, try a fresh approach – such as allocating among global regions and currencies.

    • Avoid complex products and concepts – Nothing communicates with distrustful investors better than "plain-English" ideas and products. Don't try to sell a distrustful investor on a variable annuity with enhanced living benefit riders, purchase credits, roll-ups and spousal protected withdrawal values. If the client needs a tax-deferred investment with professional management and diversification, what's wrong with a plain-vanilla variable annuity?

    • Emphasize clear fee disclosures – For all clients, fees and expenses mean "money-out-of pocket." For distrustful investors, disclosure of fees and expenses also can be a litmus test of honesty and integrity. Taking an extra five minutes to walk clients through the costs they are paying is one of the quickest, surest ways to build personal trust.

    • Monitor certain news sources – With its investigations and Freedom of Information Act requests, Bloomberg (www.bloomberg.com) has become the leading source of information for investors who want to hold financial institutions and government agencies accountable. Two blogs deserve kudos for "telling it like it is" to distrustful investors are Calculated Risk (www.calculatedriskblog.com) and Zero Hedge ( www.zerohedge.com).

    • Emphasize your fiduciary standard of care – You don't have to wait for the SEC study in January to communicate to clients your own standards of fiduciary responsibility in delivering personal financial advice. They key points to emphasize are that you: 1) always put clients' interests first, without conflicts of interest; and 2) continue to deliver a standard of care throughout the relationship, not just at the point-of-sale.

    Two Reasons to Work with Distrustful Clients

    There are two powerful reasons to identify distrustful clients and target messages and services to them.

    First, their numbers are growing and they probably will keep growing for at least the next decade. It will take that long to stow away the baggage of the global financial crisis, implement rulemaking under Dodd-Frank, and restore distrustful investors' faith in financial markets and firms. In the meantime, distrustful investors are an attractive, discerning, high-growth segment of your market. Some are looking for new advisory relationships.

    Secondly, they will make you a better advisor. If you can understand why some investors cringe when they hear the name "AIG" or grow suspicious whenever Timothy Geithner speaks, you will become a better communicator and investment guide for all clients. Distrust has always been a virtue for investors because it drives positive behaviors such as trusting in your own instincts and digging deeper to find integrity and honesty. Prior to 2008, too many investors had grown too trusting of large financial institutions, ratings agencies, complex or leveraged investments, and conventional investment wisdom.

    Each time you encourage distrustful clients to share feelings and opinions, it will remind you that the financial world has permanently changed, and the foundation of future growth in your profession and practice must be built on renewed trust.

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