Investors and investment choices: determinants of the financial advisors persuading the investors and the role played by financial advisors on the decisions of the investors

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This study makes an attempt to understand the support extended by financial advisors through reviewing the various scholarly articles on financial advisors.

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International Journal of Management (IJM) Volume 9, Issue 6, November–December 2018, pp. 34–53, Article ID: IJM_09_06_004 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=9&IType=6 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication INVESTORS AND INVESTMENT CHOICES: DETERMINANTS OF THE FINANCIAL ADVISORS PERSUADING THE INVESTORS AND THE ROLE PLAYED BY FINANCIAL ADVISORS ON THE DECISIONS OF THE INVESTORS S Veena Hindustan Institute of Technology and Science (Deemed to be University), India ABSTRACT There are many number of investment avenues with simple choices like investments in banks deposits to complex investment avenues like investing in share markets and others. The investor gets confused and sometimes misled with vast amount of information available. In such a case, the investor may require a support while searching for the information, evaluating the alternatives and finally deciding the investment avenues. This support may be available from personal sources like family members, friends or peers or from intermediaries like financial advisors. This study makes an attempt to understand the support extended by financial advisors through reviewing the various scholarly articles on financial advisors. Key words: Financial advisors, personal characteristics, information search, evaluation of alternatives, decision making, impact. Cite this Article: S Veena, Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors. International Journal of Management, 9 (6), 2018, pp. 34–53. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=9&IType=6 1. INTRODUCTION The objective of the article is to identify and understand the characteristics of a Financial Advisor necessary to initiate a communication and the role played by the advisor in various stages from information search, to evaluation of alternatives, to decision making from among the alternatives and impact created by advisors in the minds of the investors. http://www.iaeme.com/IJM/index.asp 34 editor@iaeme.com
S Veena Methodology The study is solely based on reviewing the various scholarly articles on financial advisors on personal characteristics of the advisor, the role played by the advisors in information search, evaluation of alternatives, decision making and their impact on the behavior of the investors‟ decisions. Findings The study, by reviewing various articles and from the research findings of various researchers, has found out that the services of advisors would surely benefit the investors to a large extent, helping them to make an optimal investment decision. The study also found out that the investors with more income tend to utilize the services of financial advisors than with less income investors. Future Research The study can be taken as a prelude for investors for utilizing the services of the advisors and advantage that can be reaped. In future for the financial stability, the investors have to necessarily seek the support of advisors. 2. LITERATURE REVIEW Introduction There has been a phenomenal change in the financial services sector and has led to a development of large number of financial institutions coming out with large number of investment products in savings, insurance, mutual funds, equities and commodities. At present, the Indian economy is fast growing with high disposable income, and so has high saving potential. The rapidly changing financial structure and its market with complexities makes an individual investor, with such a high disposable income, confused and sometimes even worrying as to choice of an investment, the amount of the investment and to gain maximum profits out of such investments. Also the investor gets baffled with the choices as he lacks the knowledge, skill and the time to spend for researching the avenues. Chater et al.(2010), have informed in their paper, that consumers clearly struggle with understanding investments, with very few able to identify the investments which would meet their requirements or give them a best return. Objective The objective of the article is to identify and understand the characteristics of a Financial Advisor necessary to initiate a communication and the role played by the advisor in various stages from information search, to evaluation of alternatives, to decision making from among the alternatives and impact created by advisors in the minds of the investors. Methodology The study is solely based on reviewing the various scholarly articles on financial advisors on personal characteristics of the advisor, the role played by the advisors in information search, evaluation of alternatives, decision making and their impact on the behavior of the investors‟ decisions. Financial Advisors Lowings and Thomas (2008), in their research conducted for FSA, found out that the consumers did not consider themselves to be confident and their experience is limited to one http://www.iaeme.com/IJM/index.asp 35 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors off purchase. In such a situation, the investor has to depend on someone to make his choice the most optimal one. Financial Services Consumer Panel (2008); In addition the increase in income and wealth of some people adds to the need for more financial advice. Senthil Mullainathan (2012), in his article, says that a variety of forces, from social interactions with friends and family to advertising and media, can influence their choices. In a survey of retail investors, Hung et. al. (2008) found that 73% of all individuals surveyed consult a financial advisor before purchasing shares or mutual funds. Howcroft et al., (2003): Faced with a wide range of product choices, research has indicated that investors seek to manage their investments through the use of financial advisors. Lack of financial awareness, limited or no access to financial information, their intricacy and the lawful and contracting requirements makes an investor to approach the financial advisor for professional advice. Chater et al., (2010), in their research, have clearly indicated that financial advisors play sales and execution roles, as well as their primary role of providing information and advice. Studies of financial behaviour have concluded that financial education, counseling and advice might help individuals engage in financial practices that support longer term financial security. Various other studies have also iterated that advice of financial advisors improves investors‟ cognition and enhances the financial capability of the investors.(Collins, 2012). Financial advisors, as the name suggests, take up the role of helping the investors in analyzing the various investment avenues, educating them on pros and cons of various investment avenues, helping them in making important financial decisions, realizing their goals and dreams, meeting their obligations and finally achieving a peace of mind. The financial advisor makes a detailed assessment of the investors‟ financial position based on their goals and aspirations. They make recommendations by assessing and comparing the range of products generally representing the whole market. The potential benefit of engaging financial advisors is ultimately to increase the wealth, protect it from inflation and have a smooth consumption. As such the financial advisors in this study refer to independent advisors, and advisors with advisory firms. Senthil Mullainathan et al .,(2012) also feel that that the investment market knows very little about the financial advisors, though their presence is required for investment advice. Lowings et al.,(2008), in their report submitted to FSA, has indicated that investors perceive financial advisors as professionally qualified, has attained higher education, and has the knowledge to deal with large sums of money and so there are quite trustworthy and professional. They continue to iterate that the consumers choose their financial advisor based on their initial feelings about the advisor in terms of their personality and approachability. The consumers tend to remain with the financial advisor, if they feel that the advisor is right for them. The consumers regarded the advisor in the main role when large sum of money is involved. Chalmers and Reuter (2011), are of the view that as investors derive utility from the one-on-one relationship and their lower levels of financial literacy make them value financial advisors. The opaque and inconsistent terminology in the industry is however largely incomprehensible to the layman, and technical terms may mean different things from different providers or different terms may describe the same feature (Sandler, 2002). Martenson (2007) preferred consumers to turn to their financial adviser or contact person for help to make better decisions. Angelova & Regner (2012), commence their paper with the comment that, for most of the consumers the market for financial products appear like a jungle. Hence, advice is required by the consumers and they turn to expert intermediaries who provide advice of financial products. Vera Popova, (2010), in her paper, initiates that a client hires an advisor and hopes to receive truthful advice. In a research conducted among the German investors, it was found out that 80% of them consult a financial advisor. In Europe, a vast majority of respondents have said that they trust the advisors and their advice. Investors in Romania, the Chezh Republic and France are most likely to consult a financial advisor. (Chater et al., 2010). http://www.iaeme.com/IJM/index.asp 36 editor@iaeme.com
S Veena Hilgert et al,(2003), in their paper, had confirmed that individuals have a preference for television, radio, magazines and newspaper. Duflo & Saez 2002, found that individuals rely on financial advice from friends and colleagues for making saving decisions. Vera Popova (2010), in her paper initiates that in the financial market context, a client hires an advisor and hopes to receive truthful advice. Many studies have concluded that the basic reason individuals hired a financial advisor was that these professionals were more knowledgeable than the client. Akerlof and Shiller (2009) go the extent of saying that the uninformed financial decisions by investors were the reason for global financial crisis in 2008. Montmarquette and Viennot (2012), in their paper, have found that advice improves the investment process in each of the identified phases of decision making. In their research, they have concluded that the investors who have had a financial advisor for almost 58% more financial assets than those who do not have a financial advisor. They have also observed the public opinion surveys commissioned by the financial services industry that those who seek advice are those who are financially better off. The financial advisor is said to use CRM in understanding and influencing consumer behaviour through meaningful communications in order to improve customer acquisition, customer loyalty, and customer profitability. (Swift 2001).In a special report in the website, www.ssgafunds.com, it has been reported that an investor generally seeks an advisor who is experienced and knowledgeable, one who can help the investor make, or single handedly make on the investors‟ behalf, difficult financial and personal decisions. Mckenna et al.,(2003) had quoted the words of Mary Rowland in National Association of Personal Advisors meeting held on 1999, that the primary role of a financial planner is to help clients overcome their personal dysfunctions and lead better and more rewarding lives. 3. PERSONAL CHARACTERISTICS: Personal characteristics play an enormous role in determining which of the market players prevail. (Axel et al, 2010). Rajaobelina et al.,(2009), in their paper, Customer orientation is being developed by the financial advisors and they are pretty sure that this is the indicator for buyer-seller relationship. It is personality variable that the financial advisor reflects this character while meeting the investors disposition Communication Jaffe et al, (2011), in their white paper, have iterated that, to draw relevant factual and emotional information from the client and knowing how to handle it adeptly requires good communication skills in every interaction. Listening truly to the clients, interviewing effectively to make the client feel understood, managing the delicate issues that money can evoke, are the potentials required for the most successful advisors. Jaffe et al.,(2011), in their article, have described the five key generalist skills that form the foundation for good interviewing and communication. a. good interviewing (conversation) with a client is a process of discovery, with surprises and layers of experience. b. ability to speak directly and honestly, to listen well in situations of stress or conflict, and to handle those crucial conservations that need to occur. c. explaining the investment avenues in understandable English to make the client educated and sends the message that “this is about you, the client – your involvement, your understanding, and your comfort” d. passive listening is essential as to understand what the client is talking about, receiving the client‟s words and feelings with the eyes and ears of the great listener. e. advisors should be aware of their feelings whether nervous, angry, confused or under attack and possess the skill to monitor themselves as these reactions emerge and then to not let their feelings influence what they do. An important aspect of being a financial advisor is that he understands the customers‟ needs, expectations and concerns. McKenna (1995), in his article, talks about communication, where in the financial http://www.iaeme.com/IJM/index.asp 37 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors advisors initiate the dialogue by opening themselves to investors and also sustains it by involving investors as partners for further process. While financial advisors communicate with the investors, their tone of voice, friendliness and empathy can be experienced by the investors. The role of a financial advisor in communication is that of a „harmonizer‟, who brings harmony in the investments decisions of the investor. (Rogers et al., 1976). The more the financial advisor communicates with the investors, their thoughts and behaviours can be reinforced or preferably improved while deciding about the investments. Croson (www.ssgafunds.com), in the special report, have insisted that the investors value that communication which the financial advisor can tell them just enough about the subject. Chater et al., (2010), in their research, have recommended that communication between advisor and investor is effective, even for simple investment decisions, thereby increasing the propensity of investors to follow recommendations. Trust Trust is the main component in the sustainable context. The literature has suggested that the trust as one of the main components which play an important role in influencing the investors to have business with the advisors. Kenneth Arrow,(1972), in his book, gave expressed trust as follows: “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time.” Sapienza and Zingales call Trust, “as an asset, is crucial to the development of any nation. Without trust, cooperation breaks down, financing breaks down and investment stops”. Notions of trust and trustworthiness can be said to be important measures of the value of financial advisor. (Montmarquette et al 2012).Monti et al.,(2014), in their paper, has defined trust as “responsive behaviour‟, indicating relational factors that define interpersonal relationships. In their research, they asked their respondents to identify the factors that are instrumental in trusting the advisor and the responses included the technical competency of the advisor, communication traits and accessibility and overall environment of his work space. Trust is a complex state that comes about because individuals do not know what the motives and intentions of others are (Kramer, 1999). Riegelsberger et al (2003): Trust has been described as a device to reduce complexity, a shortcut to avoid complex decision- making processes when facing decisions that carry risk. Beckett (2000), has quoted thus: the research reveals that in many instances trust is a personalized characteristic whereby relationship is maintained between a reliable advisor and the investor. The Special report in the www.ssgafunds.com has quoted the words of famous psychologist Dr. James Grubman relating to trust thus: “If I tell you personal things about myself or my family, I need to trust you, the advisor, the advisor will handle well”. Chater et al., (2010), have reported that the investors completely trust the advisor and do not perceive the advisor to be biased. They have also reported that the advisor manages the investors‟ emotions and thereby affects investors willingness to trust. Advisors are positive, increasing their willingness to help the investors, to cooperate and makes the other party to trust in negotiations. In a European Survey, it has been concluded that the less educated households had trust financial advisors to decide on buying stock or other risky and more sensitive collective investment products. (Georgarakos and Inderst , 2010) Gambetta, Diego (2000) define Trust: “When we say we trust someone or that someone is trustworthy, we implicitly mean that the probability that he will perform an action that is beneficial or at least not detrimental to us is high enough for us to consider engaging in some form of cooperation with him”. They continue to iterate the definition of trust that the others intention is not to cheat us but in their knowledge and skill to perform adequately over and above their intentions. The investors‟ ignorance or uncertainty about the investment http://www.iaeme.com/IJM/index.asp 38 editor@iaeme.com
S Veena alternatives becomes central to the notion of trust on financial advisors. Robinson (1996) defined trust as a person‟s “expectations, assumptions, or beliefs about the likelihood that another‟s future actions will be beneficial, favorable, or at least not detrimental to one‟s interests” (p. 576). Investors trust their advisor to provide advice that benefits the client first. This trust has been developed by the financial advisors by „putting the clients‟ best interest first‟. (The Brondesbury Group). In their experiment, Carlander and Johansson (2015) found that there is a positive association between trust and the likelihood of using an advisor to make investments. Warnick et al., (2016), had established that while the components of trust index was split and run, trust in financial advisor dominated in explaining investor behaviour. Trusting became necessary when the additional planning required for future savings and emergency fund. Chater et al,(2010), had confirmed that the investors tend to mostly or completely trust the information or advice given by the financial advisors. Knowledge As a financial advisor, one of the most important aspects is to master theoretical and practical knowledge in the broad range of investment alternatives and its implications. On mastering the knowledge, this has to be combined with professional skills and abilities to deliver the results effectively. Hanna et al(2010),: there are a large number of detailed areas of knowledge for financial planners so more detailed categories of advice could be identified. Financial Planning Standards Board has defined the knowledge framework into: 1. Financial Planning Principles, Process and Skills 2. Financial Management 3. Tax Principles and Optimization 4. Investment Planning /Asset Management 5. Risk Management and Insurance Planning 6. Retirement Planning 7. Estate Planning and Wealth transfer 8. Integrated Financial Planning. Crossby et al., (1990) specified that a “salesperson‟s expertise reflects the identification of relevant competencies associated with the goods or service transaction”. Chang (2005): In matters such as personal finance, in which people lack information or expertise, professional advice is sought after – particularly as the degree of complication or the need for specialized knowledge increases. Peter Dunn in his blog has written: The first quality of a financial advisor should probably be “humility paired with knowledge”, a high level of specific knowledge (IngaL-Lill Soderberg, 2012). The financial advisor should be able to give the investors‟ confidence via their vulnerability. In an article in www.motilaloswalmf.com, the financial advisor has been compared with that of a teacher: “Be it a teacher or financial advisors, both of them are entrusted with a major responsibility of imparting knowledge so the objective of both the concerned parties is achieved. While a teacher is entrusted with teaching a subject(s) with set syllabus with his/her students, a financial advisor is delegated the responsibility of imparting financial knowledge through various investment”. Axel et al (2010), in their white paper, have commented about the selection of financial advisors by the investors. They have suggested a framework, wherein knowledge of Investors‟ goals and Objectives and Knowledge of financial markets form the two important components of the framework. Investors differ in their goals and objectives, so to provide an optimal investment solution for a given investor, the financial advisor must have an intimate understanding of that investors‟ unique circumstances. A quality communication between the investor and the financial advisor helps to find out the risk tolerance, meaning how much risk the investor is able to take and also how much risk the investor is comfortable taking. Knowledge on the investment markets allows a financial advisor to provide intelligent, appropriate investment options for investors. Anderson and Weitz (1989) spoke about competence and operationalised the term in many ways: one such operationalization is the http://www.iaeme.com/IJM/index.asp 39 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors financial advisor‟s knowledge about the market for the investor and the ability to provide effective sales promotion materials. Quality of Service Superior Customer Service is important first and foremost because it helps generate customer loyalty – a bankable advantage, even in surprisingly small doses.(The Empathy Engine). FCA, in their fact sheet to the financial advisors, has given comprehensive areas where the financial advisors should provide quality services. These include: a) advice on the alternatives given and informing them about the risk factors involved in those alternatives, b). information on customer needs and objectives, attitude to risk, affordability, tax status and entitlement to state benefits, c). whether the customers‟ attitude towards the risk has been explored including the product risks as well as the circumstances in which these risks might occur, d). responsibility of informing the investor about the suitability of the investments, e). considering whether the services provided to the investor even if the investors‟ circumstances change. The services also include whether all the relevant information has been captured before making any recommendations, whether the recommended investment match the customer‟s risk taking ability, recommending the most appropriate product, and providing the level of service committed in the initial document. It has been researched that that there is a need for empathy in the financial advisors approach - an approach which can sense customers and respond to customers‟ issue – only those financial advisors who embrace, in their values and practices an ethos of empathy, realize customer service as a sustainable competitive advantage.(The Empathy Engine). Davidow et al., (1991), in their paper in HBR, has spoken about developing a strategy for investor service by the financial advisor and providing an optimal level of service for each investor set. Providing an optimal level of service helps the investor to make his/her decisions appropriately. The services of the financial advisor take the dimension of strategic orientation by providing good quality services and focusing on long- range growth of the investor as well as the financial advisor. While servicing the mature customers, it becomes imperative for financial advisors in case of an elderly investor. (Kennett et al.,1995). Transparency Jack Waymire (2012), a financial advisor and founder of investorwatchdog.com, has insisted Transparency in all aspects of transactions a financial advisor is expected to have, so that he can stand apart from other advisors and win more business. He continues to iterate that a value can be created by introducing and practicing transparency. According to him, there are five important points that have to be adhered for transparency. 1).Ethical advisors do not withhold information from investors.2).Transparency provides the facts the investors need to select the advisor with the best qualifications, not the sales pitch.3). Transparency focuses on Credentials, Ethics, Business Practices, and Wealth Management Services.4). Investors should trust what they see and not what they hear.5).Their selection of a financial advisor is far too important to base it on verbal information. Increasing the level of transparency will help the advisors to improve their long lasting and satisfying relationships with the investors. (www.ssgafunds.com) Axel et al (2010), in their article, say that the investors should be treated as financial advisors would treat themselves and disclose the information necessary to understand the investment process. A detailed list of investments sorted by type, the fees to be paid, performance vs relevant benchmark should be given as a report to the investors. Advisors must show the ability and willingness to explain and justify their portfolio management practices. Jack Waymire (2012), in another article, defines transparency by financial advisors in three parts:1). Advisors practising transparency tend to provide accurate information to http://www.iaeme.com/IJM/index.asp 40 editor@iaeme.com
S Veena investors. 2). Transparency is synonymous with full disclosure.3). the information is voluntary. Advisors make the process for obtaining information easy for investors. Goey, in his book, has stated that improved disclosure might stifle sales a little in the short run, but it would also add some much-needed trust and transparency. To understand whether a financial advisor is transparent or not, the investors have to pose questions to them, as to whether they are fiduciary, service charges, information about interests, and interests of the investors be put first. Hung et al (2015): Increased transparency is necessary if investors are to understand the potential conflicts of interest that their financial advisors face and be able to make informed decisions about how to invest their money. Emotional stability One of the Big Five Personality Traits proposed by Digman(1990), Emotional stability refers to confidence, sure of themselves and adventurous, exhibiting bravery and unencumbered by worry or self-doubt. Crankshaw (2006), It is understood that the financial advisor has to understand the various financial traits like hunters, money masters etc., and help them to make decisions which provides both financial stability and emotional stability for the investors, which requires that the financial advisor has to be knowledgeable and emotionally stable. In a website „The Covenant Group‟, Alden Cass (2014), describes about how a financial advisor is expected to identify and remove the clients‟ pain points. An unhappy client may not represent a crisis but an opportunity to build trust and a stronger relationship to deliver a better client experience is possible when the financial advisor manages his emotions. The financial advisor should get connected with the clients, to make them feel special, understood, heard and validated for their concerns. The financial advisor achieves emotional discipline, he is sure to be trusted advisor that clients so desperately need to guide them through the complexity the markets. Improving emotional stability, leads to a stronger connection with clients, which will convert to increased client centered service, increased referrals, and an improved quality of life for advisors. A study has revealed that the financial advisors are expected to provide empathetic and personalized services to the investors. It has become imperative for the financial advisors and also the demand is growing that the financial advisors have to connect with the investors at various levels like emotionally, intellectually and socially. Grubman‟s bottom lines: the financial advisors should integrate the financial and personal into their financial advising practices, so that the investors feel comfortable and continue their relationship with the advisors. (www.ssgafunds.com) Availability of advisor Inga-Lill (2012), in their doctoral thesis, has spoken about the time and place for a physical meeting at the advisor‟s office. The frames in time and space and the fact that the meeting is pre-booked gives an assurance to investor that the suggestions ought to be given by the advisor will be well founded. 4. ROLE OF INFORMATION SEARCH In today‟s context, the information is overloaded from various angles, that the individual investor gets baffled and frantically searches for a base where he or she can rely upon for the optimal investments. The investors are stressed out, becoming anxious, tensed and attention span getting reduced, resulting in remembering difficulty and memorizing and thus leads to poor decision making.(Wadding 2003). Monti et al.,(2014), have confirmed that investors are aware of the fact that they are not well equipped to judge the technical financial information they receive.Research has evidence that advisors are in possession of unique information and that has more credibility with the investors. Moutinho (1987) defined information search as http://www.iaeme.com/IJM/index.asp 41 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors “an expressed need to consult various sources prior to making a purchase decisions”. Cho & Lee (2006) have concluded from their study that the investors appreciate the potential value of information search that they may not be inclined to take time to collect a large amount of information from many sources; instead obtain information efficiently by consulting professionals who offer more decision relevant information. Lee & Cho (2006) have quoted in their paper that the investors often seek financial advisors for the decisions which require technical knowledge and expertise. Howcroft et al.,(2003), in their research, have found out that information on investment (around 47%) tended to be obtained predominantly through professional advisors. Also they continue to posit through their study that the investors prefer to talk to somebody face to face when selecting their products. Tseng et al.,(2011), in their research, information searches have a strong positive influence on investment choices, especially expert advice. As the investment decisions have to be made in the context of increasing complexity and uncertainty, this leads investors to information from professional advisors. In a White Paper (2012), it has been found out that there has been a considerable increase in the investor inquiries regarding the investment choices. In a research it has been reported that the financial advisors have shifted their focus from reduction of transaction costs to providing information. The advisor has been the dominant source of information for buying investments. The advisor has been mostly likely to be the first source used and the last source used by more than any other source. (The Brondesbury Group, 2012). Lee(2005), in his paper, coins the term “information intermediary” which refers to human or a non-human party designed to assist investors in information processing. Rose (1999), defines it as an economic agent supporting the production, exchange and use of information in order to increase the value of the information for its end user or to reduce the cost of information acquisition. Lee (2005), while detailing about intermediaries, mentions financial advisors, whose role is to reduce the time and effort investors spend on information acquisition and processing. He continues to iterate that offering intermediaries has been suggested as one way to help consumers cope with problems caused by information overload. Investors‟ reliance on information intermediaries for their decision making has been increasingly noticeable in recent years. (Rappa 2003). The financial advisors are sought for the aspects like risk, perceived expertise and opportunity cost of time. Mitra et al.,(1999), in their research, have come out with an important finding that high risk credence services (financial services) are associated with greater information search and greater reliance on personal information services. They also continue to iterate that the higher the risk is perceived in investments, the greater the importance of personal sources in making the decision. Lee & Cho (2005), in their research, have found that specially those investors who see themselves lacking knowledge and ability in financial matters tend to perceive higher value of using financial advisors. Allen et al.,(1998) in his paper has vocalised thus: “Without intermediaries, the informational barriers to participation would prevent investors from reaping the benefits of the new markets and the markets themselves might not survive”. Murray (1991), in his study, through his propositions and survey, has iterated that the personal sources (financial advisors) are more preferred by consumers (investors), personal sources are more effective and that respondents indicate a greater confidence in personal sources of information. Nilsson et al., (2010), in their research, have found out that financial advisors are most popular source used by the investors to get information about the investments. Tseng (2012), in his paper, has said that organized and valuable information from advisors might induce high-income investors to purchase more investments. Cho (2006) had concluded in their study that the seeking of information from professional advisors tend to increase when it is perceived by the investors that the investments are risky. Jonas (2003), in his paper, had quoted few researches indicating the lack of knowledge, confidence or expertise in the investors increased the likelihood of client seeking information from advisors. http://www.iaeme.com/IJM/index.asp 42 editor@iaeme.com
S Veena They are also strongly influenced by the advisors who are confident, expert, trust worthy and a reputation for accuracy. Jonas(2003), in his research, had concluded that the advisors presented the information in a balanced fashion, considering supporting and conflicting evidence to the same extent. It also has been found out through various research that advisors are considering more information than the investors and very thorough. The advisors were seemed to recommend the investments which are best suited for investors‟ preferences individually. According to Gelatt (1989) notion the advisors‟ job is to reduce complexity to the investors; meaning they presented less pieces of information to their investors than they searched while making recommendation. Jonas (2003), in their study, had mentioned that advisors were motivated by accuracy motivation; the reason being, the considering the consequences of wrong decisions searched for more conflicting evidences. Lee (2005) summarises that the key benefit of using financial advisors (information intermediaries) is to increase the efficiency of processing information relevant to decision making. Kennett et al., (1995), have understood and iterated that while presenting the information to the investors, the financial advisors have gone to the extent of increasing the print size on brochures etc. Chater et al., (2010), have reported in their paper that investors do little searching and instead typically rely on the advice of a professional advisor. The advisor influences and persuades the investor by inducing positive emotions and some investors are influenced by the presence of advisors‟ expertise. They have iterated that consumer advisors and formal study are more likely to be used for background financial knowledge than searching for available investment options. Generally the factual information about the number of different types of investment and an explanation about its pros and cons are explained by financial advisors. Collins (2012), has established that the investor hires an advisor thereby reduces the marginal cost of searching information relative to searching without assistance. The advisor acquires the expertise on the relative technical topic and is able to spread the cost of acquiring that knowledge across various clients. Capon et al.,(1996), while researching on mutual fund investments, found that the investors preferred advisors for information source, and this source ranked high above other personalized sources. 5. ROLE OF EVALUATION OF ALTERNATIVES In the website codot.gov, the process of analyzing and evaluating alternatives applies evaluation criteria to alternatives or options in a way that facilitates decision making. Refining the alternatives have to be done to develop a final alternative option. This may involve a single step or a series of steps depending on the complexity of the alternatives and the decision. While evaluating the investment alternatives, key attributes like return, risk, tax benefits, liquidity and convenience are considered. An evaluation would be viewed as difficulty when decision makers fail to see how they can assess the alternatives, even though a procedure may be clear to them. (Thompson 2003).In the website alliancebernstein.com, they have recommended especially for a new investor, a financial advisor‟s help is required to determine the proper allocation to fit his or her lifestyle. In case if there is an investment portfolio, the financial advisor can evaluate the investors existing investments and determine if they meet the investors short and long term goals. The reason quoted is that the advisor has the time, knowledge, research tools, experience and expertise to evaluate the investments. Capon et al., in their research, have found out that affluent consumers invested in mutual funds on the influence of the advisors. The advisor influenced performance group and the advisor influenced/service/substance groups invested large amounts in mutual funds; they are significantly focused. Allen & Gale (1998) have spoken about the evaluation of financial advisors: “To evaluate a complex security, a complex portfolio, or a complex strategy requires more than just knowing the facts about a firm‟s balance sheet. It requires financial expertise that an ordinary investor usually does not possess. Intermediaries assume the role of advisors, http://www.iaeme.com/IJM/index.asp 43 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors who bridge the gap between the investors‟ lack of knowledge and the expertise required to get the most out of sophisticated markets”. McKenna (1995), in his article, has spoken about real time marketing where he insists the importance on focusing on real-time consumer satisfaction, providing the support, help, guidance in evaluating the investments and winning their loyalty. Chuah & Devlin (2011), have quoted the recent approaches to consumer policy in UK. The hypothesis is that if the investors are provided with as much as information possible and help them to evaluate and improve their financial capability, the investors are sure make more informed and suitable choices in their investments. Thaler & Sunstein (2008), in their book, have explained about Nudge: Financial advisors necessarily take up the role of a Nudge, whereby the investors‟ behaviour is altered in a predictable way to make an intelligent choice out of the alternatives carefully evaluated without forbidding any options or significantly changing their investment alternatives. Diacon et al., (1996), in his paper, has pointed out thus: to make an informed choice while making investing in various avenues the investor has to understand the essential differences between simple products and more complex products, and to evaluate the relative merits of the different avenues. At this crucial moment, the knowledge and service of the financial advisor comes in handy and helps investors in evaluating the various investments. Hamilton‟s (2001) concept of CRM is exactly what the financial advisor does while evaluating the alternatives; the financial advisor stores and analyses the vast amount of data produced by various interactions with the investors, the services rendered yields a greater insight into customer behaviour. This insight helps the financial advisor to suitably charge the investors based on their spending intentions. Gronroos (1997) has observed that when the relationship between the investor and the financial advisor becomes closer, the investor shifts his focus from evaluating the investments to evaluating the relationships as a whole. This necessarily creates a value to both the investor and the financial advisor. In a survey conducted among the Japanese financial institutions, it has been found that the investors have been the main focus and that the investors needs have been received by these institutions and it has been evaluated and integrated into their decision making choices. (Turner,1994). Advisors typically present several choices of investments to clients while deciding on the suitable investment. The investors believe that the advisor will recommend what is best for the client even at the expense of their own commission. (The Brondesbury Group). The Brondesbury Group (2012) have commented that nearly three quarters of investors agree that the advisor discusses the pros and cons of the investments while recommending an investment. As the investor becomes familiar with the investments, the discussion slowly shifts to a broader discussion of selection criteria. In a survey conducted for UK‟s FSA, it has been reported that while making evaluation of investments, the main concerns were type of the product, personal confidence and trust in advisors. The investors have stated that they consulted a financial advisor about the specific product to choose. (Chater et al., 2010). Debling, (1999) has pointed out that the financial advisor does an evaluation of the investment avenues and finds out the best package value at any given time for their investors. Continuing with Anderson and Weitz (1989), the competence of financial advisor could be understood from the ability to help the buyer plan, evaluate and purchase. Stendardi et al., (2006), the financial advisor develops a financial plan based on investor‟s goals and ascertain from where they are to where they want to be. While processing the investment avenues for their investors through a sequence, Stendardi et al (2006) have recommended that financial advisors will help investors in evaluating the investment avenues based on the goal set by them. While evaluating the investments, the advisor helps the investor by developing a plan and discloses the various assumptions in generating the recommendations and the logic used http://www.iaeme.com/IJM/index.asp 44 editor@iaeme.com
S Veena in evaluating the investments. Kahn, in the special report (www.ssgafunds.com), has reported that the choices that have to be made in investments are similar to health care issues and are unpleasant or difficult, which in turn, requires someone (financial advisors) to make those kind of choices for them. “Because they are stressful and not fun to think about, they would rather ask a financial agent to make those choices”. Soderberg et al., (2014): The investments are viewed from technical aspect based on the probable outcomes, evaluating those investments and making recommendations based on the customers‟ risk preferences. 6. ROLE OF DECISION MAKING The investors, for a better outcome and for more accurate or optimal investment decisions, it becomes imperative to seek out and attend to advice of an advisor. Interacting with the advisors makes the investors to think of the investments in new ways or alternative ways of investments not previously considered (Heath & Gonzalvez,1995). Allen & Gale, (1998), in their paper have posited that even among the very wealthy, the use of private banking services and hedge funds, where advisors make investment decisions on behalf of their clients, has become increasingly common. They have also iterated that the intermediaries can help in evaluating on the choice of securities and also beyond this; it can offer some assurance that there will be pleasant surprises. Dealing with the intermediary provides insurance against risk. Specializing at high levels and also formalizing, involvement and participation while deciding investment alternatives for the investors, by the financial advisors, have being done by them with great zeal. (Lievens et al., 2001). Violetta (2007), while discussing the literature review in the research paper, has suggested that the ageing population in particular require the help of the financial advisors for processing complex financial information. Kahn and Baron(1995), had claimed in their paper, that the advice of advisors are sought by the consumers especially when high stake is involved and emotionally difficult decisions are to be taken. Logan (2015) in his article has pressed that: “The most consistent advice given by skilled financial advisors is to hold off making any major financial decision and do nothing with the money – at least in the beginning”. Pfau (2016), in his article, has pointed out that the good advisors adopt a new methodology, by which, they attempt to find out what the investors needs to achieve with their wealth. There is immense value in comprehensive financial planning and good decision making which is made possible only by a good financial advisor. As investors tend to make mistakes while deciding the investment choices, they look for financial advisor for investment decisions as an alternative. (Allen 2001). In the survey conducted by Brondesbury Group (2012), it has been proved that out of every six investors interviewed, five of them identify themselves having an advisor relationship where the advisor makes the recommendations and then the client decides what to do. In fact they discuss multiple investments and finally decide what to buy. The decision is certainly the investors‟. Don Trone (2016), in his article, predicts the future of the financial advisor to be a behavioural governance coach, takes on a greater leadership role in the eyes of their clients. By 2020, elite financial advisors will be valued for their BIG thinking. Warnick et al., (2016), in their research, have emanated the following conclusions regarding the advisors involvement in decision making. The respondents believed that the advisor should be left to decide everything with regard to investment decisions, that they should rely mainly on the advisors for investments, that the investor should consider the advisors‟ proposal before deciding, and ask the advisor about their opinion before deciding. Chater et al., (2010), in their paper, have found out that an advisor helps investors to come out of their inertia when the savings and investments are concerned. During the decision process, information is provided to investors both about the products and the possible biases likely to affect the investments. In their study, they have reported that nearly 58% of investors‟ final choice of products was influenced by advisors, while the purchase decision was initiated in a quarter http://www.iaeme.com/IJM/index.asp 45 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors occasions. When investors suffer from limited information and also from certain biases, the advisors have taken the role of educating them and also counteracting their biases in deciding the investment avenues. Nearly six out of ten investors had informed that they were influenced by the financial advisors and their final choices of investments were based on the recommendations by the advisors. Investors in the Chezh Republic and UK are particularly likely to cite a recommendation from a financial advisor as their main reason for choice. They are most likely to be guided by a financial advisor in their choice. Abhijeet Chandra (2008), in his conference paper, has recommended that the financial advisor has the ability to analyse the behavioural issues of an investor and helps to formulate efficient investment strategies. Financial specialists have endorsed that the investors are indeed sure to get precise benefits by integrating recommendations from financial advisors. The recommendations come from expert power possessed by advisors because of their knowledge. It has also been proved that different strategies for decision making has been employed by the advisors from that of investors, which essentially increases the effectiveness of investment decisions. Monti et al.,(2014), in their paper, have expressed that advisors are being requested by investors to decide on their behalf, as if advisors would decide about their investments. Heath and Gonzalez(1995), in their paper, have researched the recommendations from advisors are sought as it helps the investors to make better decisions and avoid mistakes, helps them to organize their thoughts, and makes them more confident in their decisions. 7. IMPACT OF FINANCIAL ADVISORS Rajaobelena et al., had concluded in their research that trust and satisfaction strengthens the long term relationship between the financial advisor and the investor, where by the investors will be prone to provide referrals. They have proved in their research that the investors are willing to repurchase from the financial advisors when their expectations are fulfilled. Huntley (2006), in his paper, has found out that when there is a strong relationship between investors and financial advisors, the investors are willing to recommend financial advisors to their counterparts. Ramsey & Sohi (1997) has found out in their paper that when the customers are satisfied with their financial advisors, they intend to do business with financial advisor again and there tends to be a greater anticipation of future interaction with those advisors. Roberts et al., (2001), in their research paper, have concluded through their research, that the advisors service has influenced the investors‟ intention to say positive things about the advisor, intends to keep purchasing, encourage friends and relatives to do business with the advisor, willing to test new investments, and willing to share more information with the advisor. Healy (1999), in his paper, have posited that long term customers buy more, use less of time and bring in friends and family as new customers. McKenna (1995), has iterated that the financial advisor‟s willingness to give investors access to them and view their actions and getting feedback becomes an integral part on the role played by the financial advisor whereby both investor and the financial advisor can develop themselves. Colgate et al., (1998) has echoed certain findings that the satisfaction, lower quality alternatives and good investment size promotes commitment among investors and is being developed by providing benefits superior to the alternatives, shared values and communication and goodwill by the financial advisors. Investors tend to shift to other financial advisors, if they are providing better services. So it has become imperative for the financial advisors to provide better and appropriate services. The financial advisor offers unique or superior benefits to the investors that the investors retain with their financial advisors and never think of switching off to another advisor. To retain the investors with themselves, the financial advisors provide quality services with continued effort. The quality services, in this context refer, to the quality http://www.iaeme.com/IJM/index.asp 46 editor@iaeme.com
S Veena of service process which meets the investor expectations and tends to exceed their expectations. Hughes (1994) has observed thus: The advantages of maintaining long term relationship with the investor is that they contribute greater profitability expand their relationship more deeply and refer their friends and relatives. The same idea has been substantiated by File & Prince (1994) in his research that the satisfied investor will continue to have relationship the advisor and refers other investors to his advisor and encourages them to stay with the advisor. The financial advisor understands that the long term profitability of the investor is the major prerequisite by putting together services which in turn gets the best results for the financial advisor as well. The commitment created by the financial advisor on the investor has an effect that there are less chances of changing the provider (Kiesler, 1971). With the advent of interactive technology, the financial advisors are in a position to provide customized adaptations while delivering services to the investors. (Debling, 1999). Yorke (1999), in his book, has suggested that the impact of services of the financial advisor can be sensed through the involvement and ultimately integration, if the benefits of „peace of mind‟ or „confidence‟ is being developed and sustained, a full range of services is being provided to meet the clients‟ growing needs, the financial advisor gives a feeling that the investor is treated individually and that the financial advisor is always available to offer a speedy service. Appiah-Adu et al (2001), while discussing about the customer retention, have identified operational efficiency as an important predictor, wherein, they regularly and systematically seek improvement and demonstrate a sound working relationship with the investors. Ndubisi and Wah (2005) have found out through their research that the impact of services of financial advisors can be understood from the satisfaction exhibited by the investors from the trustworthy behaviour, genuine commitment to service, informing customers efficiently and accurately, delivering services competently, handling potential and manifest conflicts skillfully by the financial advisors. The impact of service can be best understood from the fact the financial advisor gets to gain the privileged information about customers‟ needs and thereby serving them satisfactorily. The impact is such that the advice given by financial advisors to the investors makes them to depict a higher level of financial assurance and peace of mind. (Montmarquette et al 2012). Montmarquette et al (2012), have indicated that having a financial advisor significantly increases the person‟s level of confidence that he or she will have enough money to retire comfortably. They have also reported that a satisfied investor with his or her financial advisor is an indication that he or she is willing to continue services with the advisor. Stendardi et al., (2006), concludes that the advisor determines whether the investor is comfortable with the investments and takes care to understand the investor by posing more additional questions and concerns and addresses them. Chater et al.,(2010), have established that the investors would recommend their financial advisor to a friend or would make another purchase. Satisfaction has been the highest among the investors regarding their financial advisors. Haslem (2008), has asserted that the investors feelings of insecurity, can be overcome by financial advisors advice, validate their decisions, and in fact as a neutral party in spousal disagreements. Medical research has contributed itself for financial advice where it has been proved that MRI scan indicated that the financial decisions has been less taxing on the brain while receiving advice. The impact of the services of advisors is such that their advice not only gets restricted to financial matters but also extends to non-pecuniary factors and also taxes, credit, insurance etc., depending upon the needs of the investors. It has been found out from research that the services of financial advisor are seen as a complement to financial capacity and not as a http://www.iaeme.com/IJM/index.asp 47 editor@iaeme.com
Investors and Investment Choices: Determinants of the Financial Advisors Persuading the Investors and the Role Played by Financial Advisors on the Decisions of the Investors substitute for financial knowledge. As the income, education and income increases, the services of financial advisor are also most sought out. 8. CONCLUSIONS The role played by the financial advisors in various stages of investment decision making has been detailed in length and the advantages that are likely to arise for the investors in their investments. In certain research papers, there are indications that only investors with high income prefer advisors for their investment than that of investors with less income. In our country, the concept of financial advisor has been limited, to a larger extent, to insurance and it is very slowly gaining momentum. There is an opinion that advisors may not act in the best interest of the investors and chances are that they are likely to be misled. In such a situation, the financial service authorities should educate the investors, inculcate the habit of investing and thereby prosper. REFERENCES [1] A.Lievens, R.K.Moenart, (2001).Communication flows during financial service innovation. International Journal of Bank Marketing, Vol.19,Iss:2, pp. 68-88 [2] Abhijeet Chandra (2008). Decision Making in the Stock Market: Incorporating Psychology with Finance. Retrieved from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1501721 [3] Akerlof, G. and Shiller, R. (2009). Animal spirits: How human psychology drives the economy, and why it matters for global capitalism. New Jersey: Princeton University Press [4] Alden Cass,(2014).Emotional Intelligence Part I: How Self-awareness Builds Stronger Client Relationships. Retrieved from: http://www.covenantgroup.com/emotional- intelligence-part-i-how-self-awareness-builds-stronger-client-relationships [5] Allen.F., (2001).Do financial institutions matter?. Journal of Finance, 56, 1165-1175 [6] Anderson, E. and Weitz, B. (1989).Determinants of continuity in conventional industrial dyads. Marketing Science, Vol.8 No.4, pp.310-23. [7] Andrea Lowings and Andrew Thomas (2008). Services and costs disclosure - Qualitative research with potential and recent purchasers of financial products.Research report prepared for the Financial Services Authority by BMRB Social Research, February 2008 [8] Angela A.Hung, Min Gong, Jeremy Burke, (2015).Effective Disclosures in Financial Decision Making. www.rand.org [9] Antony Beckett, Paul Hewer, Barry Howcroft, (2000).An exposition of consumer behaviour in the financial services industry. International Journal of Bank Marketing, Vol.18, Iss:1, pp.15-26. [10] Barry Howcroft, Paul Hewer & Robert Hamilton (2003).Consumer Decision Making Styles and the Purchase of Financial Services. The Service Industry Journal, 23:3, 63-81, DOI: 10.1080/714005120. [11] Carlander, A and Johansson, L.O. (2015).Trust as a strategy to cope with uncertainty in delegated portfolio management. MIMEO [12] Christine M.Logan, (2015).Influencers in Financial Decision Making. Retrived from: http://jeloganltd.com/wp-content/uploads/2015/11/LOGAN-CR-MSSC-Paper-08-23- 2015.pdf [13] Claude Montmarquette and Nathalie Viennot – Briot (2012).Econometric Models on the Value of Advice of a Financial Advisor. CIRANO, ISSN 1499-8610, ISSN 1499-8629 http://www.iaeme.com/IJM/index.asp 48 editor@iaeme.com
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