In an ever-busy world, our brains can only keep track of and manage a limited amount of information; the rest, that’s less salient, just slips by. In the best of circumstances, we make good choices about what to pay attention to, and use that information to make the best decisions, but in reality the things that are most salient are not always the best bits of information. On the one hand, this leads to a lot of bad decisions; but on the other, it also creates an opportunity to help shape people’s decisions by making key information more or less salient.
In fact, planners have increasingly been using this technique in recent years, engaging in the practice of charging separate financial planning fees, in an effort to make the financial planning more salient, assuming that “clients value [more] what they pay for” and may better appreciate all the behind-the-scenes “shadow work” done on their behalf if they write a separate check. Yet a deeper look reveals that ultimately this is a rather crude way of justifying the financial planning value proposition; drawing attention to the price forces people to consider what they’re getting for their money, and therefore to think about its value, but focusing on fees is not always a positive. After all, in most industries charging separately for fees is a nuisance and a negative – it’s actually designed to discourage people from utilizing the service, from overdraft fees to baggage fees to insurance copayments and deductibles! Is it really a good idea to risk putting clients into the same mindset about their financial planning “fees” too?
Instead, if the true goal is to make the value of financial planning more salient, then perhaps the focus would be better directed towards that goal itself. For instance, by creating more/better deliverables for the client beyond just the financial plan itself, perhaps including a mind map of their financial picture or a personal organizer for their financial files. Alternatively, financial planning value might be emphasized by making a conscious effort to always direct focus in client meetings towards the planning, with a meeting agenda that explicitly highlights the financial planning “check-in” and ongoing action items. Some firms even provide clients with a list of the financial planning “shadow work” tasks (printed directly from the CRM!) being done on their behalf. Ultimately, the goal shouldn’t actually be to make financial planning fees and costs more salient, but to minimize the saliency of the costs and maximize the saliency of the value itself!
The word salient means to be strikingly conspicuous or prominent; in the context of our brains, where there is so much information to continuously take in and process, salience is important as a marker of whether something is even noticed at all. In other words, information and events that are not salient literally are not consciously noticed, which in turn impacts how (or whether) they impact us at all.
In “Thinking, Fast and Slow” Daniel Kahneman discusses several instances where saliency has an impact on how we think and make decisions. A salient event that attracts your attention becomes more easily retrieved from memory, which leads us to overestimate the frequency of the event. For instance, the popularity of the movie Jaws over the past 30 years (and more recently, the SyFy movie Sharknado!) made the risk of shark attacks highly salient, causing people to grossly overestimate the risk of being killed by a shark (in fact, being killed by a lightning strike, a falling coconut, a falling vending machine, or falling out of bed, are each more likely than a fatal shark attack!); this is called the availability heuristic. Similarly, our strong internal desire to make sense of the world leads us to create explanatory stories for random events, and recent salient events often get unwittingly incorporated into the narrative we use to explain the situation (this is know as the narrative fallacy, and was popularized in Nassim Taleb’s “The Black Swan”, which, ironically, made the narrative fallacy itself more salient!).
Kahneman’s research highlights that saliency is also important because only a small number of decisions we make are actually influenced by the cognitive, logical, rational, higher-thinking portion of the brain (what he calls “slow” thinking or “System 2”); by contrast, the majority of decisions are actually made by the fast, emotional, reactionary (“System 1”) part of the brain. While some aspects of saliency impact the fast part of the brain (as is often the case with the aforementioned availability heuristic), making something salient can also force it into the “slow” part of the brain to be fully considered.
For instance, a recent research study on saliency found that people who pay for toll booths using “E-Z Pass” (automated, electronic toll payments) are less sensitive to toll increases than those who pay the tolls in cash. As it turns out, the act of making the payment and physically handing over the money makes the cost more salient, which in turn makes those affected more cognizant about what they’re paying; those who paid by cash were more likely to know what the toll amounts were, and the researcher found that the average toll rate on cash-based toll roads rises more slowly than for electronic toll roads where the costs are less salient (i.e., when voters aren’t thinking about the payments they make, they’re less likely to object to toll increases). A similar phenomenon is observed with spending behaviors tied to cash versus credit cards; the cost of goods is often less salient when spending on credit, due to the decoupling between the time of purchase and the time of payment, and accordingly the less salient costs often unwittingly lead to higher levels of spending (sometimes problematically so!). In other words, making the cost more salient forces us to think about it more, which inevitably leads us to be at least somewhat more costs-conscious and at least somewhat less likely to just accept and pay the price of what’s set before us.
Price Vs Value Saliency
In the context of financial planning, in recent years saliency has become a tool that planners use to help direct client focus towards and make them more cognizant certain services and benefits the planner provides. For instance, it has become increasingly popular to charge separate fees for financial planning (as opposed to just earning income from commissions or AUM fees), on the basis that “clients value [more] what they pay for.” The concept is relatively straightforward: if people are required to pay for the financial planning, they’ll pay more attention to it, and value it more.
Yet the research on saliency suggests that in truth, the causal factors may not be so straightforward. Paying for financial planning doesn’t necessarily make people value it more, it simply makes the cost of the planning services more salient, which may in turn lead people to consider more carefully the value they’re getting for their cost. In other words, charging more for financial planning actually makes clients question it more (just as they question cash spending over credit card spending and cash tolls over E-Z Pass tolls). To the extent that they question the value they receive for the cost and decide that the value is good, making the cost more salient ultimately makes the value more salient as well. But not because the client literally values more what they pay for; instead it’s simply that making the payment more salient and forcing them to think about what they’re getting ultimately might make them decide to recognize the value more, too.
Although this may seem like a finely sliced nuance, it’s an extremely important one. After all, while charging (more or separately) for planning services may force clients to consider its value, which makes the benefits more salient for those who have positive outcomes, in some cases it may reveal to clients that the benefits they’re getting just aren’t worth the cost. In other words, making the costs more salient really ups the ante to ensure that maximal value is delivered; otherwise, charging separately for financial planning may actually make clients try to “opt out” of it and not pay for it, leading fewer clients to get financial planning, and ultimately making it less valuable for them! In other words, making the price of financial planning salient when the value proposition is good may be unnecessary, and making it salient when the value is not good enough may make clients utilize it less (just as clients spend less with cash and are more resistant to the cost of cash tolls).
This can also lead to a dangerous spiral. If clients don’t value the planning (because there’s really not enough value for the cost, or they just don’t properly perceive the value, or some other problem), then under the “clients value what they pay for approach” the planner might try to increase the cost to try to change the perceived value, when in reality what needs to be done is to lower the cost or deliver more value to bring the cost/benefit equation better in line! Otherwise, the more planners charge for planning, the less clients utilize it, which means they don’t value it at all, and the client experience becomes even more focused on the portfolio (since it may be all that’s left at that point!).
Yet in the end, if charging directly for financial planning is really only helpful in situations where there really is material value being provided, and even then may be an inhibitor (as some clients may second-guess the price they’re paying even if the value is good), it raises the question: are there other, and perhaps better, ways to make the value of financial planning more salient than just highlighting the cost?
Making The Value Of Financial Planning More Salient
So what are the alternatives to make the value of financial planning more salient, if not via making the way that clients pay for it more salient?
One option is to try to enhance the deliverables associated with financial planning. Given that so much of what we do as financial planners is to deliver an intangible service (it’s hard to quantify and really describe the value of “I give clients peace of mind”!), anything that can make planning more tangible will help. Accordingly, I suspect this is one of the primary reasons that we as financial planners still deliver physical financial plans, even though we all collectively acknowledge that virtually no clients ever read them after the plan presentation meeting; it’s one of the few tangible deliverables we (still) provide to help justify our cost. But a written financial plan isn’t the only kind of deliverable that can be provided. For instance, mind mapping can be used as a physical financial planning deliverable to visibly show how the planner is getting the client more financially organized. Even the client discovery/data gathering meeting can be turned into a more tangible experience by actually physically going through a client’s files for them and delivering a fully sorted personal organizer as a take-home at the end of the meeting.
Another approach to the issue is to simply take more overt actions to remind clients of the services that you have provided. For instance, I’ve met several firms that, once a year, will print the preceding years’ worth of client activity (associated with any/all staff members of the firm) from their CRM and present it as a document to the client, simply to show the client how much has been done on his/her behalf over the prior 12 months. Often, clients don’t even realize how much “shadow work” happens behind the scenes.. at least, until it’s presented before their eyes in a clear list! Similarly, another easy way to reinforce the firm’s financial planning focus in every meeting is simply to have an agenda where a financial planning check-in, and ongoing financial planning action items, are clearly present on the list as topics for the meeting. In many cases, clients may fail to appreciate that the conversation with the advisor at the beginning of the meeting may be checking in on financial issues to the planner, but just idle “chit-chat” to the client; if you want clients to value the financial planning work that’s being done, including monitoring and check-ins, then help make it top-of-mind for them, and be certain to set the appropriate frame and context, by having an agenda that clearly articulates it as such. In fact, arguably almost any regular touch points outside of the portfolio can help to reinforce that the planner does more than just provide investment management services. And at the most basic level, there’s a long line of research in the field of marketing that shows you can direct someone’s attention towards what they should value about your product and service simply by… stating and reinforcing that value proposition!
But the bottom line is simply this: if the ultimate goal is to make clients value your financial planning more, then focus on how to make your financial planning more valuable, and how to make that value more salient to them. Drawing their attention to it by making them more conscious of the cost isn’t likely to help, and in fact can backfire; after all, in other industries “fees” are something that companies assess specifically to discourage behavior by making it more salient. No one assigns “more value their airplane’s cargo hold” because the airline charges baggage fees, nor I suspect does anyone value the flexibility of their bank’s checking accounts more because they charge overdraft fees. Health insurance companies apply fees, copayments, coinsurance, and deductibles with the deliberate intention of making the costs more salient so people will utilize services less and make fewer claims. Is that really the context you want to set when your clients consider your financial planning services?
Ultimately, the ideal should not be to making your financial planning fees more salient, but to minimize the saliency of the costs and maximize the saliency of the value itself, reinforcing the actual value that’s being delivered and the great work you’re doing on their behalf, and keeping your focus on how to make those services even more valuable in the future!