Are Disclosures Sufficient? A Micro Analysis of Impact in the Financial Services Market Author(s): James H.

McAlexander and Debra L. Scammon Reviewed work(s): Source: Journal of Public Policy & Marketing, Vol. 7, Special Issue on the FTC (1988), pp. 185202 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/30000300 . Accessed: 01/11/2011 03:18
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Are Disclosures Sufficient? A Micro Analysis of Impact in the Financial Services Market
JamesH. McAlexander DebraL. Scammon
that and decisions vitally are to Policymakers recognize investments investment important the advicemayresultin decisions which financialstability many of families.Poor investment a may, in a literalsense,financiallycripple family. Withthe importance investment of in decisions mind,the is the of purpose thisresearch toexplore potential efficacy ofpublic policy to the consumers withtheinvestment financial have and designed remedy problems proposals services markets. accomplish purpose, research To this this takes micro at howconsuma look ers evaluate choose and investment a evaluation. services, unique perspective an impact for

H. is Assistant JAMES MCALEXANDER in Professor the Department Marof keting, Iowa State University, L. Ames, Iowa 50011 and DEBRA is Professorof MarketSCAMMON ing, The Universityof Utah, Salt LakeCity,Utah84112.

The last decadehas witnessedtremendous of growthin the number consumers withfinancial investments.Inflationary activelyinvolvedin andconcerned presinterestrates, andwhatis perceivedby manyas an unfair tax sures, fluctuating who were traditionally contentwith structure,have motivated manyconsumers a savingsaccount a bankto becomeactivein the pursuit alternative at of financial investments [Stern and Gubernick Dixon 1983; Hollmanand Murrey 1985; consumer the servicesindustry demand, financial 1984].Inresponseto increased has developedan arrayof new financial productsthat serve a broadrange of consumer needs [Foster1987]. To participate in financial have markets,consumers effectively these unfamiliar to financial advisers[Foster1987; turned the servicesof professional increasingly Beaver1981].The intermediaries investorsemployrangefromthe stockbroker who may only facilitate financial transactions the Certified to Financial Planner who provides financial financial comprehensive planning. Comprehensive planning has been defined as: Thethorough collection impartial and of on and analysis informationthefactual affective dimensions a person's family's financial of or total the of needs situation; identification
andthe establishment specific of financial and objectives; the formulation, implementaof financial tion, and continuous monitoring a comprehensive plan to achieve them

[Johnson 1983].

JPP&M, Vol.7 (1988),185-202

A 1982 surveyindicated five percentof American that households were using financial planners[UPI 1985]. Other studies have revealedthat 85% of those who have disposable incomefeel a need for some kindof financial [Ross planning demand these servicescoupled for in withderegulation the 1983].The increased financial services industryhas contributed an explosionin the numberof to individuals refer to themselvesas financial that planners[Foster 1987]. Today there maybe as manyas 400,000individuals themselvesfinancial calling planners 1987]. [Roper not who Unfortunately all of the individuals call themselvesfinancial planners followethicalbusinesspractices.Abuseshavebeen committed untrained and by unprofessional people,manyof whomdo not havethe education, experience,or skill necessary to fulfillthe promisesthey make to their clients. Reports of unethical financial adviserbehavior investmentswindlesabound,with estiand matesof investment fraud one dollars year [Roper1987;Stern a exceeding billion Disclosuresandthe FinancialServicesMarket 185

186

McAlexander Scammon and and Gubernick 1985; Wall Street Journal, 3/4/87, 11/24/86, 11/18/86, 9/20/85;Business Week,12/30/85, 12/31/84;ChangingTimes, May 1986, July March 1986]. 17, 1986; U.S. News and World Report, To addressthe problems that investorsare havingin financial markets,governmentalbodies and agencies (including U.S. Congress, Securities and the and ExchangeCommission state legislatures),have adoptedor are currently advisers [Skousen the adoption proposalsto regulatefinancial of considering havealso proposed varietyof self-regulaa Beaver1981].Industry 1987; groups imageof some members tory measuresin an attemptto enhancethe tarnished of the financial services industry.This research seeks to explore, from the of which of efficacy public policyproposals perspective the investor,the potential havebeen advanced remedythe problems to consumershavewithinthe investmentandfinancial servicesmarket. The Regulation of Financial Planners At present there is no precise definition a financial of plannerand anyonecan become one [Roper1987]. Many of the people who call themselves financial are agents, planners governedby the rules of specifictrades, suchas insurance securitiesagents, andchartered underwriters. This has createdratherfraglife fewer mentedregulation. theremaybe 400,000financial Today,though planners, than10,000are registeredfinancial advisers. The InvestmentAdvisersAct of 1940 [15 USC P 80b---2(11)1982] is the federallegislation the governing activitiesof financial primary planners.It was four intended accomplish principal to objectives: 1. to correct abuses fraud; of 2. to promulgate clarify in and standardsclient fiduciary relationships; facts full of and 3. to mandate promote disclosure allrelevant inadvice transactions; and and 4. to monitor activities advisers registration. the of via since there The primary focusof the Investment AdvisersAct is on disclosure for Under the Act, investmentadvisers are are no qualifications registration. and to required discloseto clientstheireducation experienceandtheirbasis for is The majorissue addressedby the disclosurerequirement pocompensation. has with a client. tentialbias in the fiduciary the financial planner relationship or Financial plannerswho sell financial productson a commission combination basis fee-and-commission must disclosetheir role as salespersons.Concernis that otherwisethe clientmay not be awarethat the financial plannerstandsto adviceby purchasing if the clientexecutes the financial particular planner's gain investment products. to and is disclosure the fundamental traditional approach protecting Although that undermost securitieslaws, there are indications disclothe investing public in sures of the type requiredhave been inadequate the context of financial of services marketplace today planners.Manyfeel that the complexfinancial education and certification competencesimilarto reof demandsprofessional of or for quirements the practice medicine law.Thus, some of the new proposals for for involverequirements some formalpreparation for consumerprotection as a financial planner. practice the As an exampleof self-governance a professional organization, Internaby and tionalBoardof Standards Practicesfor CertifiedFinancial Planners,Inc. The and educational certification has (IBCFP) instituted programs. IBCFP,which has developeda model Planner Financial Certified the designation (CFP), grants offeredby colleges andunireviewsprograms for curriculum financial planners,

Disclosures the Financial and Services Market

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examinations bothinitial for and versities,administers qualification continuing as who designation a CFP,anddisciplines professionals do not abide their by codeof ethics[Hayden 1987]. Thereis concern existing efforts the coordination authority lack and to that As a resulttherehavebeencallsforlegislation consumers protect effectively. thatwould a financial Thosewho require licensein orderto practice planning. favorlicensing that trustin, andremay argue self-regulation helpbuild public but demonstrated competency spectforfinancial planners, legislation requiring the forlicensure theonly to protect public. is way has TheProsandCons As withmostpolicy and licensing bothadvantages disadvantages. proposals, of Licensing Tobegin understand prosand to the consofthenewproposals would that involve a licensing forfinancial it is useful examine impacts to the requirement planners, It of licensing that and generally. hasbeenargued anyformulation enforcement of standards business of conduct inherently are restrictive competition of [Young of 1987].Licensing boards, commonly composed licensed professionals, develop criteria protect thosealready that licensed thatimpede and of licensing licensing newprofessionals. standards licensure As for the of increase, number persons will and whoenterthe profession decrease thuscompetition be lessened. will Minimum have standards the effectof increasing cost of the servicesperthe formed licensed standards 1987].Thus,withminimum [Young by professionals the public the opportunity chooselow-priced to services.Critics liof forgoes andregistration thatconsumers should ableto debe censing programs argue from to serviceproviders, and velopanduse theirowncriteria which evaluate be freeto choose levelofquality that service which arewilling pay. for to they and Ontheother are to hand, licensing registration programs designed impose level some minimally and training expertise,anda acceptable of knowledge, of means protecting consumers. Advocates that are to argue consumers unable the from discern qualified theunqualified thatlicensing and canprovide programs a common to standard which evaluate from service providers. In the financial services certification examination industry specifically, by may effecton competition. haveanother and positive experience compeTraining, the of the tencytesting enhance professionalism financial may industry. planning As professionalism moreindividuals be attracted enterthe is enhanced, to may field because its "professional" of stature. newentrywillenhance This competition. the on and Policy Proposals Though effectsof licensing competition on societyas a wholeare andtheConsumer important, ultimate the concern be theimpact licensing must that haveon would theindividual inaggregate, consumer. increase and, Though licensing may prices the of of lowerquality threshold competence, through establishment a minimal Association Retired of Persons1986],it 1987;Roper1987;American [Young havepositive on individual in deciding consumers. whether Thus, may impacts current disclosures sufficient for the investing provide protection publicor whether be would a more effective it is necessary consider to licensing approach, thelikely effect bothapproaches haveonindividual would investors. Theliterature consumer on that of decision-making suggests theimpact disclosureandlicensing investors likely depend on is to uponseveralcharacteristics of the investors the financial and advisers patronize. Accessto information they affirmative disclosure onlyone influence the investment is on decision through and outcome. disposition theinvestor seekinformation, its The of to and process theability theinvestor usetheinformation of to available alsoimportant. are This and information searchand suggeststhatinvestor knowledge its role within investment are areasof potential in interest understanding indecision-making

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McAlexander Scammon and vestor behavior designing and effectivemeansto ensurethatinvestorsare adequately protected. has the knowledge been exploredacrossa number Although role of consumer of information imbehaviors,investorknowledge,as it specifically processing research. Howinvestmentbehavior,has not been exploredin scholarly pacts has wisdom longrecognized value: its ever, traditional financial is Withoutbackground a ofelementary the investor likea child knowledge, small a to forest, 1924, wandering trusting throughtangled blindly luck[Rukeyser p. 4]. in has Whileconsumer knowledge been conceptualized several different ways and Hutchinson Brucks1985; Parkand Lessig 1981], it has been [Alba 1987; class knowledge of characteris(knowledge terminology, suggestedthatproduct whichis the tics important differentiating to and products, marketrelationships), to facet of knowledge makesinformation that meaningful consumers,is the most to salientdimension knowledge the formation public of of policy(Brucks,Mitchell andStaelin1984]. This is largelytrue becauseproductclass knowledgemakes it possiblefor the consumersto ask relevantquestions,intelligently interpret and that information their decisioninto information meaningfully incorporate and Troutman, Kuss, andMazursky 1986;Johnson Russo 1984; [Jacoby, making 1984;Ruddel1979]. PunjandStaelin1983;Brucks1985;Wendler Assumingthat investorknowledgeis relatedto the impactof licensingand between knowledgedisclosure,this researchseeks to explorethe differences investorsin several important able and unknowledgeable areas of investment the behavior. First, the researchidentifies servicesconsumersseek fromfinancialadvisers.Second,it investigates sourcesof information are important the that in of advisers.Third,it exploresthe types to consumers theirevaluation financial in of information deemimportant theirevaluation financial consumers of advisers. the This micro-analysis providesa consumer-based perspectivefor evaluating remediesforthe financial servicesmarket. proposed Method To explorethe efficacyof publicpolicyproposalswithinthis marketfrom the interof focused-depth perspective the investor,this studyemploysopen-ended, interviews were selectedfor this studysince interestwas in the viewing.Depth the motivationsunderlying choices made by investors regardingtypes and This sources of information. researchwas designedto explore the process by and counselors products.The richinformawhichinvestorsevaluateinvestment interviewswas desiredto answer questionsabout tion available throughdepth whatthey do. The whyinvestorsbehaveas they do ratherthansimplydocument that with interviews were supplemented writtenquestionnaires addressed depth informaof investmentsas well as demographic informants' generalknowledge andthe writtenquestionnaire were developed tion. Both the interview protocol from a review of the literature investmentdecisions, throughconsultation on with individuals consideredto be experts in the field of finance,and through interviews withprofessional financial advisers. exploratory interviews.This samplesize The researchreportedhere involved thirty-nine different levels of was largeenoughto enableinclusion investorswithmaximally smallenough of and of knowledge investments diverseinvestment behaviors, yet was that extensive depthinterviewing possible.Interviewswere conductedby selected andtrained qualitative in fourinterviewers depthinterviewing carefully As [1984]pointout, the selectionof interviewtechniques. MilesandHuberman since the interviewers serve ers within qualitative a researchdesignis important instrument." as an "information-gathering in selected. It was The informants interviewed this study were purposively to deemedimportant interview peoplewho wouldhave the experiencerelevant

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to the questionsaddressed,vary in their knowledgeof finance,providenew and It behavior, whowouldbe cooperative. is important insightsintoinvestment to note that the samplesize is the result of informational considerations. Additional informants were intervieweduntil the information they providedwas Thatis, whenno new information generated,samwas judgedto be redundant. was ceased [MilesHuberman 1984]. pling The operationalizationthe purposive of involved selecthe sampling procedure tion of knowledgeable consumers fromamongMBAalumni, other persons and thatthe interviewers identified "financially as Less sophisticated." knowledgeable consumerswere purposively selected fromwithinthe community based upona of had perception/judgment interviewersthat the informant little investment or in knowledge formal training the fieldof finance.In eithercase, the interviewers were directedto select informants who were makingsufficient incometo investmentswere relevant.The medianincomeof inforsuggest that financial mants in this study was in the $40,000-$60,000range, well withinthe target marketidentified a national [Hira,NorrisandVan by sampleof financial planners Auken1986]. The interview aboutsixtyminutesper informant. interThe processaveraged viewers were provided with a writtenprotocolthat outlinedtopicalareas that shouldbe exploredduringthe interview.These topics included: relevanceof investmentsto the informant, knowledgeof investments,the investmentsthe informant made, the process the informants has used in makinginvestment decisions(specifically resourcesthat they haddrawnupon),the role of prothe in fessionals the process,attributes to advisimportant themin selectingfinancial financial advisers. ers, andthe sourcesof information woulduse to evaluate they The protocolofferedthe interviewers flexibility adapttheir interviewto the to the individual andto pursuethemes that emergedas important case withinthe interview. Eachof the interviews recordedon audiocassette tape. The tapedinterwas views were supplemented fieldnotes whichwere recordedby tiihe interviewby ers aftercompletion each interview.In the fieldnotes, the interviewers of recordedinsightswhichthey gained,potential effects they observedin the biasing interview relevantto the research.The database process, andothercomments consistedof morethan600 pagesof single-spaced 50 transcription, pagesof field audiotapes, and120 pagesof completed notes, thirty-nine questionnaires. The datawere qualitatively the analyzed.The analysisincluded identification of themesfromwithinthe data,andsubsequent assessmentandclassification of individual informants. Eachphaseof the analysis was conducted at least two by researcherswho met to compareand contrastindependently derivedconclusions. One of the analystswas otherwiseindependent the research,and, in of data essence, servedas an independent auditor. Informant Classification: Product class knowledge assessed through different was two methods:a written InvestorKnowledge instrument qualitative and The multiple measuresfacilitate analysis. triangulation for necessaryto establishcredibility the research.Analysisof the writtenmeasure of investorknowledgeinvolvedscoringwrittenresponses to eight openended questionspertaining investmentknowledge(TableI). The merit of a to of given answerresultedin an allocation between zero and three points. The score was computed summing scores for the individual the knowledge by questions. The scale yieldeda Cronbach's coefficient a alphaof .915 indicating high [Peter 1979]. Using a mediansplit to classify informants degree of reliability resultedin twentyinformants as classified "high and knowledge" nineteeninformantsclassified "low-knowledge". as The secondassessmentof financial came fromqualitative knowledge analysis

190

McAlexander Scammon and Table 1. Question

1. How are the earnings of municipal bondstaxed?

InvestorKnowledge Means' Group Knowledgeable LessKnowledgeable

2.84 1.00

2. 3. 4. 5. 6. 7. 8.

What it mean does when bond sella is ingata premium? is What a P/Eratio? P/E What a high ratio does mean? What a capital is gain? What meant the term"marginal is by taxbracket"? in What factors be should considered theselection aninvestment? of In termsof anindividual stock,what does"Beta" to? refer of Mean Means Group =

2.21 2.89 2.26 2.63 2.10 2.73 2.21 2.48

.45 .75 .10 1.00 .05 2.00 .05 .68

from 'Scored 0 = incorrect 3 = correct. to

Overall Mean Median Minimum Maximum Std. Dev.

12.46 points (24 possible) 11 0 24 8.172

of informant the commentsmade withinthe interview.The analystsevaluated exhibitedby the informants of andbreadth financial during knowledge accuracy as who investorsexhibthe interview.Informants were classified knowledgeable of in of ited breadth accuracy theirunderstanding the characteristics investand informants vehicles.Less knowledgeable exhibited ments andinvestment only a The analystsreacheda consensusin of investment topics. superficial knowledge as and seventeen informants "high-knowledge" eighteen informants classifying were not clearlyclassified the qualitaas "low-knowledge." informants Four by tive analysis. were classified consistently Over seventy-five percent of the informants and measures. This high degree of throughboth the quantitative qualitative of attests to the credibility the measures.Inthe ninecases which correspondence the referredto additional were not consistently evidence, classified, researchers the field such as the interviewer's notes, for assistancein classifying informants. education addressedthe natureof the informant's This additional information as andoccupation, wellas insightsgained the interviewer by (e.g., collegemajor) in the process of conducting interview.For example,in one case the interthe into viewer's field notes revealed that the interviewerhad been "badgered" As with informant the writteninstrument. a result, the informant's assistingthe more crediblethanthe written were considered the commentsduring interview able to reacha consensusconcerning measure.In each case the analystswere The finalanalysisresulted in twenty informants the finalclassification. being

Disclosuresandthe FinancialServicesMarket

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as and classified "high-knowledge" nineteeninformants beingclassifiedas "lowThis classification used throughout remaining was the knowledge." analysesto lookfor similarities differences and betweenthe two groupsof investors. Results Consistent withthe purposeof thisresearch,the resultsreportedhere compare informants with regardto: the services informants high- and low-knowledge desire of financial the sources of information informants woulduse in planners, a financial andthe attributes the financial of that are selecting planner, planner to them. Resultsare illustrated with quotations frominformants and, important where possible,chi-square statisticsare provided facilitate to summarization of the qualitative data.The classification the qualitative for cross tabulations of data is explained eachtopicof interest. for Financial Services Boththe high-andlow-knowledge investorswere equally Planning likelyto reportdesiring the assistanceof professional advisers.However,there did appearto financial in be differences the servicesthatthe informants advisers. soughtfromfinancial Two groupsof informants were identified: those who desired comprehensive financial services, andthose who desiredlimitedinvolvement advisplanning by ers in the financial decision-making process. Those informants were desirousof comprehensive who financial serplanning vices were seekingan adviserwhocouldremovefromthe investorthe responsihis affairs.These investorswantedsomeone bilityfor managing or her financial to take care of their personalbookkeeping, short-terminvestmentsand longtermfinancial and with planning savings.The following excerptfromaninterview a low-knowledge informant illustrates these themes: I would have where would he handle of my all basically a comprehensive of thing type he out he do shot investments, would figure mytaxesand would thewhole formeand allI would to dois payhim havehim intouch meonwhat have and with are get things on. going The informants desiredlimited who involvement professional financial advisby ers in theirfinancial affairs to maintain directresponsibility superviand preferred sion over theirpersonal financial affairs. These consumers advissoughtfinancial ers to supplement theirinformation, to gainaccess to financial or markets.The investorillustrates following excerptfrom an interviewwith a high-knowledge these themes: Thispersonhas accessto certain executetransaction those on exchanges, mainly and whatI want from person is a financial this who I exchanges that's planner. don't him want to doanyfinancial for planning me. Comments were classified to according whetherinformants expresseda desire
for comprehensive or limited services from a financialadvisor. Cross-tabulating investor knowledge with the services investors seek from financialadvisers suggests that less knowledgeableinvestors are more likely than other investors to desire the services of comprehensive financialplanners (Table II).1 Knowledgeable investors seem to desire more problem-specificservices, such as specific financial markets. information,or access to particular

the were frequently mentioned helpful the selecas in Selecting Financial Three sourcesof information Planner:Sources tionof financial advisers.First, the recommendation friendsandrelativeswas of of to the Information important manyinformants. Second,manyinformants reported importance of the recommendation otherprofessionals. of Third,manyinformants reported thatthe reputation the company of withwhichthe financial adviserwas affiliated adviser. mayassist in theirselectionof a financial

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and McAlexander Scammon Table2. Low Investor Knowledge High

aChi-Square 1.90 D.F. 1 .16 Sig.(Yates)

PlannerTask Comprehensive 12 8 Limited Service 5 11

of TheRole ofFriends Twentyinformants were identified whomthe recommendation friendsand for andRelatives relativeswouldbe important whenseekingthe servicesof a professional financial and adviser.TableIIIillustrates relationship the betweeninvestorknowledge the in use of friends relativesas sourcesof information the selectionof a financial and investorsfindfriendsand relaadviser. Analysissuggests that low-knowledge than investors. sourceof information do high-knowledge tives a morevaluable informant illustratethe imporThe following remarksfroma low-knowledge assessmentsof financial advistance of friendsandrelativesin some consumers' ers: in we our and uh, business, took,and covering furniture During business years thefloor me that man think and hada young whoI didn't wasqualified wasn't giving thereports so I wanted, uh,I inquired friends, uh,theyrecommended CPA of and so my highly it
of that and was uponrecommendation a friend I inquired hiredhim.

Inthiswaysome consumers view friends relativesas a sourceof trustworand information. Severalinformants suggestedthat friendsand relativeswould thy and not knowingly relationship, that a strangershouldnot betraytheirpersonal be trustedlikea friend. from TheRole ofProfessional A recommendation a professional person,such as a lawyeror accountant, Recommendationsemergedas an important for evaluation. source of information the informant's of who While the relyinguponthis source important, number informants reported of information relativelysmall: only nine informants was reported desiringa between inThere was no apparent recommendation. relationship professional vestor knowledgeand desire for this source of information. Typicalresponses in of recommendations selectinga finanindicative the importance professional of cialadviserwere: or Either accountant an an of someotherrespected recommendation party. Through ... that know attorney I might individwho another I alsoconsulted mybrother-in-law a CPA recommended who's with ualwhocharged awful more an lot money ... from trusted professionalsources provide a method Recommendations some whichcredibility be established risk reduced.Apparently and may through are consumers believethatprofessionals in a betterpositionthanare consumers financial to screenprospective advisers. for that of Company reported the reputation the company whomthe adviser Reputation Ten informants informant source of information them. The following to works is an important of of are remarks illustrative the importance company reputation:

Disclosuresandthe FinancialServicesMarket Table3. Selectionof a FinancialAdviser:Reliedon FriendsandRelatives No Yes 7 12 13 7

193

Low Investor Knowledge High

= chi-square 2.06

d.f.=

= Sig.(Yates)

.15

I ... what do check other with an Basically I would is find, would people find institution ... for wellreceived company existence their time,research history past fairly large
investments howfinancially and soundthey are.

The companywith which the adviser is affiliated seemed to affect both the and withusingthe adviser'sservices. adviser's credibility the riskassociated It appeared some consumers haveanimplicit that may feelingthatif a company it For has an established reputation willnot employunqualified representatives. adviser'sexpertise, one example,when asked how he wouldassess a financial informant stated: knowledgeable Whether werelinked another to a business they through organization secure brokerage if in morecredibility, than would theyjustcame andsayhi ... I'mgoodat what it um, I do. a informant foundsecurityin dealingwith a familiar Similarly, low-knowledge firm.Whenaskedwhetherhe was concerned withhis financial technical adviser's he responded: competence, It neverentered mind because we'vehadsuchgoodluck,we'vealways that felt my we'vehad luck this good with company. the of Apparently, firmthat the adviserworks for providesan umbrella good andfeelingsthat shieldedthe investorfromthe risk of dealingwith experiences or financial advisers. incompetent unethical An establishedcompany also reduces risk. For example,one informant rethathe wouldonlyworkwitha largecompany becausehe wouldbe able ported to "sue"themif the performance his investments of was disappointing. Another in a firmthatis "financially informant mentioned sound." finding security The lack of an apparent between investor knowledgeand the relationship relianceuponprofessional recommendations company and reputation suggests that these sources of information be equallyaccessibleand similarly may perceivedas validindicators credibility consumers of to of independent theirproduct class knowledge.More surprising than the nonsignificant was relationship the smallnumber informants of recommendations relatively mentioning professional and companyreputationas sources of information. These readily available sources were expectedto be popular sources of information couldbe intethat evaluation. gratedintothe consumer's Attributes Two types of attributes in Important emergedas important the selectionof the financial adviser:the financial adviser's andpersonal/social characteristics. As knowledge the literature these attributes representative the cognitiveand are of suggests,
or to a, an investment ... ... company thathadsome stability thatwouldgive them

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McAlexander Scammon and in affectivecomponents that are important the development trust [Simons, of Berkowitz Moyer1970]. and was reportedby sixteen of the informants as Adviser's adviser'sknowledge Knowledge The financial of advisers.Highan attribute to important theirselectionandevaluation financial of andlow-knowledge investorswere equally likelyto reportthe importance this inferencesabout of information two different attribute. However, types provided or the the adviser'sknowledge: adviser'sdiplomas credentials,and a personal of assessment made by the informant the adviser'sknowledge.The sixteen as adviser'sknowledge informants were classified evaluating financial a primarily The cross-tabulaof or by his/hercredentials through critique his/herknowledge. tion of the source of inference(knowledgeversus credentials)with investor is knowledge presentedin TableIV. differences between more knowledgeable Analysissuggests some important between andless knowledgeable investorswithregardto how they differentiate financial advisers.It appears fromthis analysis that, whileboth groupsof invesadindicated that knowledgewas an important tors (high-andlow-knowledge) investorsseemed more likely to limit viser attribute,the less knowledgeable to an their assessmentof the adviser'sknowledge the credentials advisermay of have. The following remarksillustratethe importance credentialsto these informants: low-knowledge whether wereableto helpme too credentials helpme decide they might Somebody's
... theireducational background.

about check carefully thecredentials. [I'd] very to investorswere more inclined includean assessment of the Knowledgeable Titles and credentials content of the adviser'sknowledgein their evaluation. or to were either unimportant these informants, were but one part of an inteadviser'sknowledge.The followingexcerpts grated assessment of a financial of illustratethe importance the adviser'sknowledgeto these knowledgeable informants: that Some I would selectthem... that had knowledge expertise. they somedifferential with I didn't andthattheywereableto use thatalong the, the financial, have greater financial resources. Interviewer: it impress when Does somebody theyarea CPA? says you but in to It makes recognize theyhavequalified a degree their that Informant: me field, as to their that's qualification upto meto self-appraise. invesinvestorsmay be more likelythanless knowledgeable Knowledgeable to contentbecausethey are betterequipped makesuch tors to assess knowledge on an assessment;suchan evaluation requiresignificant may knowledge the part
of the investor. This was suggested by the process that high-knowledge infor-

of content: mantsreported usingto assist in the evaluation knowledge

themsome loadedquestions. Probably asking by thatwell. They Allhe was doingwas layingout products, didn't he knowhis products him on it, he couldn'tuse the powers of weren't cheap and when you questioned all discrimination; he coulddo was use his canned speech, So he was no good. Less knowledgeableconsumers may feel less capable of evaluatingthe content of a professional financialadviser's knowledge and therefore may be more likely to rely on easily identifiedcues such as titles and diplomas. The remarks of one low-knowledge informantsuggested a perceived inabilityto evaluate expertise:

Disclosures and the Financial Services Market Table 4.

195

Selection of the Financial Adviser: Assessing Adviser Knowledgel Credentials Content Knowledge

Low
Investor Knowledge High

5
2

2
7

statistic reported tosmall due size. 'Chi-square not sample Interviewer: would judge How you expertise? Informant: can't Ijust answer I don't know. mycaseI would judge In him that, really just more conversations them other on with on subjects. Interviewer: as? Such Informant: idea. No cues that Credentials, titles, and education appearto be easily identifiable informants particularly find usefulindicesof a financial adviser's low-knowledge As the literature consumers infercomplexcharacteristics ability. suggests, may fromcues suchas titlesandcredentials and [Olson Jacoby1972;Parkinson 1975]. These cues may providethe consumerthe reassurancethat some "indepenadviser qualified perform to dent," or objectivebody has foundthe financial services. The comments two low-knowledge of informants were consistentwith this premise: Interviewer: is CPA Why important? Informant: I Because puta lot ofweight their in that knowledge theyhaveto haveto get thatcredential. Interviewer: CFP Would (Certified Financial ifit be Planner) important meant something similar a CPA? as Informant: ... I would to be surethat is infactanexpert. Yes he like titles or education be perceivedas readilyapparent Further,credentials, may standards whichthe investorcanbe reassuredthat the abilities a financial of by adviserare somehowsuperior the consumer's. to of this perception Illustrative were the comments one low-knowledge of informant: As faras trust,I'dhaveto say... someeducation, that convince me something would
thathe cando betterthanI can... if he was accredited hada the righteducation or to

showthathehad someexperience.

that in Socially-OrientedAnother groupof characteristics was important the selectionof a financial Characteristics adviserwas best describedas "socially-oriented" attributes.Twenty-fiveinformantswere identified who mentioned such as socially-oriented characteristics, friendliness religiousbeliefs, as salient attributesfor their selection of a and financial adviser.Informants low levels of financial with to knowledgeappeared be more concerned with feelingcomfortable theirinvestmentadviserthan with didinformants moreproduct with class knowledge (TableV). whichillustrate importance socially-oriented the of attribTypicalresponses utes to low-knowledge informants were: It is niceto dealwithsomebody youclickwitha littlemorewithin thatregard that
... [religion]

Butboth them, ended doing foruh,onefellow, is young, age,and of I've work up is, my of I've him of uh,we kind havea realgoodrelationship. known fora couple yearsand we uh,we playgolftogether. callsme whenhe hassomething hotandhe's He that's

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McAlexander Scammon and Table5. AdviserAttributes: SociallyOriented Characteristics NotImportant Important 9 11 16 3

Investor Knowledge

High Low
4.91

= chi-square

D.F.=

= Sig.(Yates)

.02

mademe somemoney. we, we havea littlebit of socialrelationship So besidesa business relationship. a The low-knowledge informants indicated willingness accepta financial also to adviserwithless expertisethanothers, if they couldfinda financial with planner whomthey couldcommunicate feel at ease. TableVI presents an analysis and of the informants stressed eitherease of communication technical or who competence in theirevaluation a financial of advisor. the communicate withme. Because well we'vegot to [I would choose] onethatcould I to sitdown, gotto feelateasewhen talk thisfinancial I've planner. it [I would take] explain to me, youknow,whereI could probably the onewhocould ... understand at mylevelevenif he wasn't down as quite knowledgeable he would be sincere. probably more The literatureoffers a possibleexplanation this result. Low-knowledge for of investorsmay stress affectual characteristics becausethe evaluation affectual elementsdoes not requiretechnical andthereforethe less knowlsophistication, in and edgeableinvestorwillfeel morecomfortable confident his/herassessment of this dimension thanin the apparently more difficult of gauging task expertise. In comparison, investorswithhighproduct classknowledge mayfeel moreconfident in theirassessmentof the financial adviser'sexpertise, and feel that they canbetterpredict financial the adviser's from of performance anevaluation expertise thanfromanevaluation affective of characteristics [HughesandKasulis1985; and Swan, Trawick Silva1985;Cialdini 1979; OlsonandJacoby 1984;Schellinck remarksare illustrative knowlof 1972; Cox 1967; Brock1965]. The following who of adviser's edgeableinformants stressed the importance the professional expertise: I would ... who a choose financial the deal make planner had great ofexpertise I could
... be the to upforhis inability explain I would ableto understand material ...

the investorsare able to compensatefor the adApparently knowledgeable with viser'sinability communicate them. to for Summary and This research providedinsightswhich have important implications public for policy.As the analysissuggested, there was some evidence that the services Implications Public Policy which consumersseek from financial advisers were related to the investor's differencesbeclass knowledge.Second, there were some important product in consumers how they learnedaboutandevalutween high-andlow-knowledge in were summarized TableVIIas: atedfinancial advisers.These differences

Disclosures and the Financial Services Market Table 6. Adviser Attributes: Communication vs. Expertise Communication Expertise 5 13 9 4

197

Investor Knowledge

High Low
3.69

= chi-square Sig. (Yates)=

D.F. =

1
.054

Table 7. DecisionsAbout Financial Advisers Servicesdesiredfrom a financial adviser:

Summary of Differences Between Low Knowledge and High Knowledge Investors Low High Knowledge Knowledge

financial Comprehensive planning services Limited, problem-specific of Selection a financial adviser: Sources Information of Friends relatives and Professional recommendations credentials Company of Type Information Titlesandcredentials of Content adviser's knowledge Adviser Characteristics characteristics Socially-oriented Affective characteristics Expertise

Morelikely Less likely

Less likely Morelikely

Morelikely Equally likely Equally likely

Less likely Equally likely Equally likely

Morelikely Less likely Morelikely Morelikely Morelikely

Less likely Morelikely Less likely Less likely Less likely

1. Less knowledgeable investors weremorelikely thanknowledgeable investorsto turn to theirfriends relatives assistance finding evaluating and for in and financial advisers. Few investors(eitherwith high-or low-knowledge) to appeared use professional recommendations company or in of advisers. reputation theirevaluation financial 2. High-knowledge investorswere morelikelyto reportevaluating financial a adviser's the thanwere less knowledgeable invesability evaluating adviser's by knowledge tors. Less knowledgeable investorswere more likelyto reportlimiting theirevaluationof ability the adviser's to titles or credentials. 3. Less knowledgeable investors were morelikelyto reportassessingsocially-oriented such the in of adviser characteristics, as "liking adviser," theirevaluation the financial thanwere knowledgeable investors.

198

McAlexander and Scammon 4. Less knowledgeable investorswere more likelythan knowledgeable investorsto of characteristics ratherthanexpertisein theirevaluation reportstressingaffective a financial investorswere morelikelyto reportstressingthe adviser.Knowledgeable financial adviser's expertise.

These findings suggest that consumerswith the least amountof knowledge advisers. do not critically evaluatethe technicalcompetenceof their financial for the opinionsof friendsand relatives, and/or Rather,they are likelyto ask adviserbaseduponhow they "feel,"andhow much preferto evaluatea financial evaluation the financial of adviseris likely the they "like" adviser.Theirpersonal and to be limited surrogates,suchas titles andcertifications, peripheral to cues, of such as those indicative affectual Further,such consumers,who are qualities. evaluatea financial not likelyto critically adviser, are the most likelyto comadviser. affairs over to a financial turntheirfinancial pletely thatless knowledgeable consumers These conclusions maybe vulnersuggest financial advisers. This research suggests able to unqualified and/orunethical on adviser's thatdisclosure education, experifocusing the financial requirements ence andformof compensation have little of the desiredimpactuponlowmay consumersare the least likelyto use this investors.Low-knowledge knowledge invesin Additionally, low-knowledge type of information theirdecision-making. which or such as friendliness likability, a tors have established set of attributes, is advisers.The implication are important them in their selectionof financial to information is currently that thatthe sort of disclosure maynot facilitate required this research suggests that less knowledgeable their evaluation. Specifically, it information: maybe too complex to consumers not inclined use disclosure are it and/or maynot seem relevantto them. for theirlevel of understanding, Second,there is evidencewithinthis researchthat licensingandcertification consumersaboutthe comavenuefor informing couldbe an important programs use consumers advisers.Less knowledgeable currently titles petenceof financial as and certifications cues from whichto evaluatethe competenceof financial the advisers. Unfortunately, disclosureof titles may actuallybe deceptive to investors an investors since titles may give unknowledgeable low-knowledge in there is a greatdealof variance the sense of security.Currently unwarranted and educational testing standards necessaryto obtainthe varioustitles available the to financial Complicating value of titles to consumersis the conplanners.2 of them. For example,nearlyhalfof our samplewas sumers'limited knowledge and unaware the CFPdesignation manyof those thatknew of the title didnot of knowwhatit meant: else title is I don't I just know, would thatit (CFP) probably another thatsomeone say hasthought up. that I don't if a know there's specific planner. degree saysI amnowa financial ... to I never realized theyhad be certified I guesstheyshould. that
In order to protect consumers, it appears that some common standard for

who is certification necessary. If these titles were available only to individuals level of requisiteknowledge,relianceon the title for shown a minimum had for assuranceof competencewouldprovidereasonable protection investors. It will is likely that legislation be necessary to providea commonstandardfor
planner. practice as a licensed financial The benefits of administeringa certification program must be tempered by recognition that a certificationprogram creates an "entry barrier," which may restrict competition. Acquisitionof the knowledge necessary for an individualto pass the competency examinations would increase entry barriers. As entry is restricted, the services of those individualswho are appropriatelylicensed to practice would be more in demand. The administrative costs of certification

Disclosuresandthe FinancialServicesMarket

199

wouldtend to be passed on to those customerswho used financial programs advisers.Bothof these pressureswould tendto increasethe priceof the services of certified access to theirexpertiseby some invesadvisers,potentially limiting tors. Further,the valueof a certification to invesprogram manyknowledgeable since they already tors wouldappear be minimal, to have a well-developed proinvestments financial and advisers.Limitcess andcriteria critically for evaluating for invesing marketentrymay have detrimental consequences knowledgeable tors. The extent to whichlicensing operateto excludepotential parrequirements fromany portionof the marketdependsuponthe conditions ticipants imposed between a requirement for upon securinga license. A possible compromise withits inherentrestrictions competition a program and on testing andlicensing of mere registration with its lack of protection may be a "staged"qualification of in One system. An example this conceptis available the accounting profession. a or accountant a bookmay choose a certifiedpublicaccountant, noncertified wouldallow more knowledgeable investors the choice keeper. This approach adviserswithdifferent levels of expertise(whopresumably wouldcharge among different butit wouldstillprovidea meansfor assuring knowledgeable less fees) investorsthat certifiedfinancial advisersdo in fact have the level of expertise in theircredentials. implicit This sort of certification and system wouldnecessitatethe development imof plementation a consumereducation program focusingon the meaningof the variouscredentials the services licensedadviserswere competentto perand form. The IBCFPhas proposedas one of its goals the promotion public of awarenessof the CFP designation [Roper1987]. Such a programcould help increasethe level of financial of knowledge investorsas well as assist consumers in identifying available help them with theirfinancial to affairs.An professionals educational couldencourage investorsto seek recommendations from program otherprofessionals as CPAsandattorneys) fromprofessional and associa(such tionswhenevaluating financial advisers.Apparently consumers havelittleawareness of existingresourcesto assist themwiththe selectionof a financial adviser and/or in they havelittleconfidence theirusefulness. of investors in this Thoughthe behaviorscharacteristic the low-knowledge withcurrent studysuggestsome potential problems attemptsto protectconsumers in the financial services marketand some potentially viablealternative apfrom considered. should It proaches,the implications this studymustbe carefully be recognized that the studyhas some important limitations the including nonnatureof the sample,the small samplesize, and the potential representative interactions. drawn biasingeffects of interviewer/informant Further,conclusions in this research are based on informants' of behaviors,perceptions, reports
beliefs and attitudes; all the cautions with regard to self-report measures are appropriate. Further research is necessary to explore and explain the relationships identified in this study. For example, future research should seek to replicate this study with a larger, more generalizablesample in order to gain a better understanding of the nature of the investment behaviors explored in this research. Relatedly, subsequent research utilizingdifferent methods might also be able to expand upon the insights gained throughthis study. Future research shouldexplore the normativeissues related to the information consumers need to make informedinvestment decisions. From that foundation, research could establish the standards by which a financialadviser should be evaluated. As a result, policymakerswould be provided guidelines that would be useful in developing a licensingprogramthat could effectively assist consumers.

200
Notes

McAlexander Scammon and

1. Giventhatthe objective the purposive of in was sampling procedure to findinformational diversity the investment behaviors knowledgeable less knowledgeable of and it informants, is likelythatthe the of the statisticunderstates strength the relationship. chi-square Consequently, resultsof the in cross-tabulations interpreted lightof the insights are The by gained the researchers. cross-tabs are offered further as evidence assistin the reader's to research,with interpretation. Subsequent a larger, is to this discussed representative sample necessary betterclarify andotherrelationships in this study. (For a discussion purposive of and sampling relatedissues see Belk, Sherryand Wallendorf [1984]). [1988],or MilesandHuberman 2. Roper[1987]provides goodreviewof the prominent a that programs certifyor registerfinancial planners.

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