In economics, goods and services can be divided into three different categories based on how they can be evaluated: search goods, experience goods, and credence goods.
Search goods have qualities you know before purchasing. For example, any brand of basic iodized table salt at the grocery store is likely to be similar with no surprises.
Experience goods can be judged only after purchase. You might love a particular restaurant, but until you order today’s special (and taste it!), you won’t know for sure if you’re going to like it.
Credence goods are goods you aren’t able to assess even after experiencing or consuming them. A good example of this is vitamin supplements — you have to trust your daily multivitamin brand will contain what it’s supposed to because you can’t easily verify it.
Financial services include aspects of all three concepts, but, ultimately, advisors largely provide a credence experience. This is true of most service professions, like your doctor, lawyer, accountant, or auto mechanic. You wouldn’t likely hire these experts if you were a world-class expert in each of these fields, so it’s difficult for you to assess the quality of services provided (especially when uncertainty is involved).
If you get audited by the IRS, are you unlucky or did your accountant push boundaries that got you flagged? If you lose a lawsuit, was your lawyer ineffective or was your case unwinnable? For services like these, you’ll probably never truly know the answer — you simply have to do your due diligence and make the best decision you can without knowing how things will turn out in the end.
If you work with a financial planner, here are three tips that might move you from wondering if you’re on the right track (the credence zone) to feeling confident and reassured (the experience zone).
• Understand what you’re going to receive. If your advisor suggests they can consistently beat the market by a large margin, you’re both likely to be in for disappointment. Ironically, the desire to achieve market-beating investment performance year after year is one of the worst reasons to hire a financial professional. In my opinion, the best financial advisors focus on all the things you can control, like tax planning, estate planning, asset location, tax-loss harvesting, and making sure your spending and saving is on track for your future. Prudent, consistent participation in markets without drastic allocation swings or frequent moves to cash is enough to put most investors far ahead of the pack.
• Differentiate the signal from the noise. A 99 percent successful medical procedure performed on a million patients will produce around 10,000 disappointed people who wonder if they were unlucky or suffered some sort of malpractice. In the same way, signing up with a new financial advisor in 2001, 2008, or February 2020 would likely have been disappointing in the short term, but the right advisor would have helped you weather the storm and make the right choices in the inevitable, incredible recoveries that followed.
• Be all in. In my experience, the most satisfied clients of financial advisors are those who are open to new ideas and eager to help their advisor optimize all aspects of their financial lives. Some people feel they aren’t getting value from service providers unless they’re constantly critical and indignant, but a myopic focus on minutiae and minor deviations in short-term investment returns will shift important focus from larger opportunities. Time is not unlimited, and every moment spent agonizing over insignificant details is a moment that could be spent on something more constructive.
Like any service profession, the quality of financial advice is hard to assess — even after experiencing it. Along with the tips above, I believe the most satisfied clients are process-oriented rather than outcome-oriented. If you have a solid financial plan and investment process with an attentive and adaptable advisor, you should be able to withstand a downturn in the markets, unexpected expenses, or even temporary unemployment. Working with your financial advisor to make the best possible choices now, regardless of future unknowns, will help you shift your relationship from the credence zone to the experience zone.
Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.