European Journal of Marketing

The paradox of customer education: Customer expertise and loyalty in the financial
services industry
Simon J. Bell Andreas B. Eisingerich
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Simon J. Bell Andreas B. Eisingerich, (2007),"The paradox of customer education", European Journal of
Marketing, Vol. 41 Iss 5/6 pp. 466 - 486
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EJM
41,5/6 The paradox of customer
education
Customer expertise and loyalty in the financial
466 services industry
Received January 2005 Simon J. Bell and Andreas B. Eisingerich
Revised November 2005 Judge Business School, University of Cambridge, Cambridge, UK
Accepted March 2006
Abstract
Purpose – The purpose of this paper is to consider the dynamics of customer education by exploring
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the relationship between education and customer expertise and their combined effects on customer
loyalty in a high involvement investment services context. The paper also considers the service
context within which customer education initiatives are delivered. More specifically, it explores the
moderating effects of increasing levels of customer expertise (the outcome of customer education) on
the relative importance of technical service quality (what is delivered) and functional service quality
(how it is delivered) in determining the loyalty decision. In doing so, the paper aims to provide
implications for the investment service firm for managing the service offering as customers develop
expertise over time.
Design/methodology/approach – The paper proposes a conceptual model that formalises the
research objectives as a series of testable hypotheses. This is followed by an outline of the research
design and method. The hypotheses are tested using a sample of 1,268 high value clients from a global
investment services firm. An analysis of the model and the results is presented.
Findings – Customer loyalty was found to be positively and significantly related to technical service
quality, functional service quality, and customer education. Contrary to expectations, however,
customer expertise was not negatively related to customer loyalty. Customer education was found to
be positively associated with customer expertise. The main effect of customer education on loyalty
was significant; however it did not diminish when customer expertise was entered into the third
equation. In other words, the conditions for partial mediation were not satisfied. Finally, the positive
and significant interaction coefficient between technical service quality and expertise implied that the
positive effect of technical service quality on consumer customer loyalty was indeed stronger when
customer expertise was high. Conversely, and consistent with expectations, the interaction term
between functional service quality and customer expertise was significant and negative, indicating
that the positive relationship between functional service quality and customer loyalty is diminished as
customer expertise increases.
Originality/value – Where there is a significant amount of research on customer knowledge and
expertise, there is relatively less understanding of how customers acquire such knowledge. It is hoped
that this paper can shed some additional light on the subject of customer education, its impact on
customer expertise and, ultimately, on the way in which service quality is perceived.
Keywords Customers, Customer loyalty, Financial services, Customer services quality
Paper type Research paper

Introduction
In search of sustainable competitive advantage, service organisations are increasingly
European Journal of Marketing looking to ways in which they can wed clients more closely to the organisation. This is
Vol. 41 No. 5/6, 2007
pp. 466-486
q Emerald Group Publishing Limited
0309-0566
The authors would like to thank Colin McLeod and Gloria Cafra for their advice and support with
DOI 10.1108/03090560710737561 this project.
 apparent in many of the, now ubiquitous, relational initiatives such as relationship The paradox of
managers, personalised web pages, product bundling, among other things. Another customer
intriguing opportunity that many firms are beginning to explore is client-firm
co-production – the notion of involving the customer in both the creation and delivery education
of the service. Services firms have for a long time known that some degree of
participation is expected, if not required, of almost all customers. Such participation,
however, has traditionally been considered something that services firms need to 467
“manage”, not actively encourage. Yet in a competitive market environment, firms are
finding it increasingly difficult to differentiate their service offerings. Participation by
customers in service production and delivery is increasingly viewed as a source of
value creation (Bettencourt et al., 2002; Lengnick-Hall, 1996; Prahalad and
Ramaswamy, 2000). Increased customer involvement, therefore, provides a means
by which firms can achieve deeper positions in specific market segments through
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increased customisation.
Co-opting customers into the creation and delivery of service, however, is
accompanied by complications that are particularly acute for marketers of technical or
high involvement products, such as investment services within the financial service
industry. The intangible and often highly complex nature of investment products are
intrinsically difficult for customers to evaluate, especially in terms of the core or
“technical” service they receive. Accordingly, clients’ investment skills and expertise
are likely to play an important part in their ability to understand, and contribute to,
effective service delivery. Since expert clients possess a richer experience base, they
may process new information in greater depth (Alba and Hutchinson, 1987, 2000;
Johnson and Russo, 1984; Mason and Bequette, 1998; Rao and Monroe, 1988) and, thus,
may feel more confident in assessing technical outcomes and questioning service
providers’ explanations than do novices when making decisions.
A logical conclusion, it would seem, is for investment services firms to pursue every
opportunity to educate their clients. Indeed, client education activities are familiar to
many investment services firms who have used them as a means for product
augmentation and differentiation (e.g. client seminars, printed materials, websites). We
argue, however, that there are potential problems associated with customer education.
The more service providers try to provide value for, and get closer to, their retail
customers by teaching and helping them to use their services, the more vulnerable they
are to losing them. More education and hence expertise equips clients with the tools
and skills to “shop around” for competitive offerings (e.g. cheaper investment advice
elsewhere). Education leads to a reduction in information asymmetries between the
firm and its customers (Nayyar, 1990). Expert clients, as a result, perceive less risk in
switching firms as a result of being more confident in assessing competitive
alternatives (Heilman et al., 2000). In other words, customer education while at first
drawing customers closer to the organisation may ironically equip customers to leave
by reducing their perceived switching costs. There is, in other words, a paradox of
customer education.
The objectives of this study are twofold. First, we consider the dynamics of
customer education by exploring the relationship between education and customer
expertise and their combined effects on customer loyalty in a high involvement
investment services context. Second, we consider the service context within which
customer education initiatives are delivered. More specifically, we explore the
 EJM moderating effects of increasing levels of customer expertise (the outcome of customer
41,5/6 education) on the relative importance of technical service quality (what is delivered)
and functional service quality (how it is delivered) in determining the loyalty decision.
In doing so, we provide implications for the investment service firm for managing the
service offering as customers develop expertise over time.
The paper is organised as follows. The next section proposes a conceptual model
468 that formalises our research objectives as a series of testable hypotheses. This is
followed by an outline of the research design and method. We test our hypotheses
using a sample of 1,268 high value clients from a global investment services firm. An
analysis of the model and presentation of results follows. The final section concludes
with a discussion of managerial implications, study limitations and directions for
future research.
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Conceptual framework
In this section we formalise our expectations for the impact of customer education
initiatives on customer expertise and loyalty (Figure 1). We integrate competing views
within the services marketing literature that suggest that customer education can be a
source of both differential advantage and vulnerability (see Burton, 2002, for a review).
We attempt to reconcile these views by examining the dual effects of customer
education on customer loyalty by integrating customer expertise as a mediating
variable. Briefly, customer education is expected to have a positive relationship with
both customer expertise and loyalty. Expertise, however, we expect to be negatively

Figure 1.
A model of customer
education, service quality
and customer loyalty
 related to customer loyalty. Finally we explore the moderating effects of increases in The paradox of
customer expertise on the relationship between elements of service quality and customer
customer loyalty. More specifically, we suggest that as customer expertise increases
technical service quality will have an increased effect on customers’ loyalty decisions, education
while functional elements of the service are expected to have a reduced effect. In the
following sections we provide a more detailed rationale behind these assertions.
469
Service quality and loyalty
Customer loyalty we define as a consumer’s intent to stay with an organisation
(Zeithaml et al., 1996) and their commitment to increase the depth (i.e. through
increased transaction volume) and breadth (i.e. through increased breadth of products
purchased) of their relationship with the organisation. Generally, loyalty has been, and
continues to be, defined in some circles as frequency of repeat purchase or relative
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volume of same-brand purchasing (Tellis, 1988). We consider a behavioural intentions

approach to measuring loyalty particularly important to a high-involvement services
context for a number of reasons.
First, service loyalty is frequently dependent on the development of interpersonal
relationships (Czepiel, 1990; Jain et al., 1987; Keaveney, 1995; Macintosh and Lockshin,
1997). Accordingly, loyalty decisions will be made with some consideration of
anticipated future interactions, or the extendedness of the interpersonal relationship
(Heide and Miner, 1992). Behavioural intentions capture the extent to which customers
foresee the relationship continuing.
Second, loyalty viewed from a behavioural intentions perspective captures the
relative attitude customers hold toward the organisation (Dick and Basu, 1994).
Behavioural measures of loyalty do not distinguish between those who have a high
relative attitude and those who may dislike the firm but are compelled to re-purchase
due to exogenous factors (e.g. contracts, lack of alternatives).
Finally, a measure of behavioural intentions is managerially valuable as it captures
the extent to which customers anticipate their relationship with the firm deepening.
Customers who purchase more of a company’s products over an extended period of
time generate more revenues and are typically cheaper to serve (Reichheld and
Aspinall, 1994). In other words, a behavioural intentions measure of loyalty captures
the extent to which relationships will become more profitable over time.
A review of the services marketing literature reveals a number of conceptualisations
of service quality. Leblanc and Nguyen (1988), for example, include five components –
interaction with customers, physical elements of the service producing system, internal
organisation, corporate image and levels of customer satisfaction. Building on the work
of Grönroos (1983), Rust and Oliver (1994) examine functional quality, technical quality
and environment quality elements of services. Parasuraman et al. (1988) conceptualised
service quality to consist of five dimensions, including tangibles, reliability,
responsiveness, assurance, and empathy – the eventual SERVQUAL measurement
instrument.
We define service quality by the two sub-dimensions of technical and functional
service quality (Grönroos, 1983). Service quality has long been considered in terms of
its processes and outcomes (e.g., Grönroos, 1983; Hausman, 2003; Kelley et al., 1990;
Parasuraman et al., 1988). We use this framework to measure service quality as it is
both parsimonious and adequately representative of more fine-grained models of
 EJM service quality, including SERVQUAL (i.e. reliability and responsiveness are
41,5/6 conceptually similar to technical service quality, while Assurance, Empathy and
Tangibles share similar properties to functional service quality).
Technical service quality refers to the quality of the service output (Sharma and
Patterson, 1999) while functional service quality focuses on the nature of the
interaction between the service provider and customer and the means by which the
470 service is delivered. To the extent that both are an important component of customers’
evaluation of the total service offering, favourable perceptions on both dimensions are
likely to be positively associated with customers’ attitudes toward the organisation and
their likelihood of remaining a customer. That high service quality leads to increased
customer satisfaction and loyalty is not a particularly novel assertion and there is a
well-established literature that provides empirical support (Bloemer et al., 1999; Chiou
et al., 2002; Cronin et al., 2000; Sharma and Patterson, 1999; Wong and Sohal, 2003;
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Zeithaml et al., 1996). In the context of investment services, which are characterised by
high complexity and intangibility, customers’ perception of their advisors’ technical
competence is likely to influence customers’ confidence in service providers’ expertise.
Because of complexity and lack of concreteness, however, customers can find it
difficult to assess service outcomes even after purchase (Crosby et al., 1990).
Accordingly, investment service firms that deliver both desirable technical outcomes
(e.g. strong investment returns, appropriate risk management) and are effective in the
means by which the service is delivered (e.g. empathetic and responsive financial
advisors) are more likely to have a satisfied and committed customer base. Strong
theoretical and empirical support for this relationship leads to the following
expectations:
H1. Technical service quality will be positively related to customer loyalty.
H2. Functional service quality will be positively related to customer loyalty.

Customer expertise, loyalty, and the paradox of customer education

Customer education has long been seen as a means for creating value for customers. It
helps customers to realise the full potential of the products they purchase, solve any
problems that may arise, and migrate to new or more sophisticated versions of the
product over time. Yet when customers no longer need help to understand a product’s
complexities, they attain the flexibility to “shop around” for competitive alternatives.
In extreme cases, customers may elect to leave the market entirely in favour of
producing the service themselves (Fodness et al., 1993). In the context of investment
advisory services, this would be illustrated by a customer self-managing their
investment portfolio through an on-line service such as e-Trade or Charles Schwab.
Hence, the more investment service providers help, inform, and educate customers, the
more vulnerable they are to losing them (Levitt, 1980). Briefly, this paradox of
customer education underpins three key relationships in our model. First, customer
education will be positively associated with both customer loyalty and expertise.
Increases in customer expertise, however, are expected to be negatively associated with
loyalty. We detail our thinking below.
For the sake of this study, we define customer education as the extent to which
service employees (financial advisors in this context) provide customers with the skills
and abilities to utilise information (Burton, 2002). Customer education is measured as
 the extent to which advisors inform customers about, and explain financial concepts The paradox of
and the pros and cons of the investments they recommend to their clients (Sharma and customer
Patterson, 1999). In other words, providing customers with the skills and abilities to
utilise information requires, first, that customers have appropriate information (i.e. education
they are informed) and, second, that they have the tools with which this information
can be understood (i.e. concepts are explained). Customer education initiatives will lead
to increases in loyalty for a number of reasons. First, efforts to educate customers will 471
be perceived as a valuable augmentation to the service process (Burton, 2002;
Lengnick-Hall, 1996; Levitt, 1980). Sharma and Patterson (1999), for example, find that
increased communication effectiveness of investment advisors is associated with
increased customer trust in the organisation and commitment to the relationship.
Second, efforts to educate customers are also likely to contribute to increased customer
efficiency, which is associated with higher customer levels of repeat purchase (Xue and
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Harker, 2002). Finally, investments in customer education initiatives will reinforce

customers’ perceptions of the firm’s positioning as a high quality service provider
(Burton, 2002). As perceptions of service quality increase at a given price, customers
are more likely to intend to stay with an organisation. Accordingly, on the basis of
these arguments we offer the following hypothesis:
H3. Customer education will be positively related to customer loyalty.
While customer education will be associated with increased satisfaction, through its
positive impact on the service process, it is also likely to lead to meaningful
improvements in the level of customer expertise. Customer expertise represents a
customer’s accrued knowledge about how a product should perform, and a general
understanding of the average performance of similar brands in a product category
(Sharma and Patterson, 2000). Customer expertise, therefore, encompasses not only
firm-specific knowledge but also market-based knowledge accrued from sources other
than the financial service provider. Customer education initiatives might include
formal orientation programs, written literature, and personalised explanations and
advice as part of the relationship management effort (Dellande et al., 2004). Educational
efforts by financial advisors will play a role in helping consumers know which
behaviours to adopt and how to perform in the service delivery process (Lovelock and
Young, 1979). Accordingly, we suggest the following:
H4. Customer education will be positively related to customer expertise.
As customer expertise increases as a result of education, clients will be increasingly
confident in evaluating the quality of service they receive and how this compares with
competitive offerings (Alba and Hutchinson, 1987). Expert customers are able to make
finer distinctions between, and understand the relative importance of, product
attributes. An ability to evaluate products more comprehensively enables customers to
base their purchase decision on the product attributes that are most relevant to their
situation (Brucks, 1985). Instead, therefore, of using one financial service provider for
all investment needs, educated clients may unbundle service offerings, cherry picking
elements of the service and negotiating more concertedly on the basis of price (Levitt,
1980). Furthermore, increasing customer expertise reduces perceived switching costs,
especially procedural costs of switching (Burnham et al., 2003). Procedural costs, which
include costs associated with competitor evaluation, learning, and set-up, are likely to
 EJM be lower for customers with a high level of expertise. In addition, expert customers are
41,5/6 likely to have increased expectations of service quality and are less likely to be
satisfied (than non-expert customers) in the service that it delivered (Jamal and Naser,
2002). Accordingly, we expect that:
H5. Customer expertise will be negatively related to customer loyalty.
472 The moderating role of customer expertise
Existing studies of buyer behaviour affirm that the degree of prior expertise a
consumer has about a product is likely to influence information evaluation and choice
(Alba and Hutchinson, 1987; Rao and Monroe, 1988). As customers gain expertise they
become more efficient at distilling information provided by their advisor; information
can be assessed in the context of prior knowledge and experiences (Mason and
Bequette, 1998). Expert consumers have the ability to see beneath the functional layers
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of the service offering and focus their assessment on the core or technical attributes. As
a result, expert clients will be more confident in evaluating overall service quality on
the basis of technical attributes (Moorthy et al., 1997). Customers with less expertise,
however, are more likely to rely on the relational and tangible cues characteristic of the
functional aspects of the service (Sharma and Patterson, 2000). They are more likely to
perceive higher risk in decision-making (Heilman et al., 2000) and so will evaluate
service quality across a range of product attributes to mitigate such risk (Brucks, 1985).
The primary implication of increasing customer expertise is that the relative
importance of functional service quality dimensions (e.g. tangible cues, empathy and
friendliness of staff) versus technical dimensions (e.g. investment returns, quality of
advice, matching of investment portfolio to the client’s risk profile) are likely to change.
More specifically, the impact of the functional elements of service on customer loyalty
will decrease as customer expertise increases. For these reasons, we advance the
following hypotheses:
H6a. The positive relationship between technical service quality and customer
loyalty will be stronger where customers have high expertise.
H6b. The positive relationship between functional service quality and customer
loyalty will be weaker where customers have high expertise.

Method
Sample
We selected clients of advisory services in a global investment services organisation,
located in Australia, as the target sample for this study. Advisory services comprise
both core service elements (e.g. investment advice, research, investment planning) and
various support products associated with these (e.g. margin lending products, cash
accounts, settlement services). This sector was considered appropriate for the study as
products are complex and a high degree of information asymmetry exists between
service providers and customers (Burton, 2002). This maximises the likely variance in
investment expertise and any accordant relationship with customer education
initiatives. Further, advisors have specialised training and are well qualified to educate
customers in the nature of the service offering. There is also recurring interaction
between a client and the same advisor; client relationships in this context are initiated
and maintained primarily through media that allow interpersonal interaction between
 the client and the advisor (e.g. face-to-face meetings, telephone calls). Because The paradox of
relationships involve high levels of interaction over extended periods of time, there are customer
ample opportunities for customer education.
A list of 4,244 clients, randomly generated from the population of 7,200 clients education
classified as “high value” by the firm, was obtained for this study. High value clients
were sampled due to the higher frequency of contact they had with advisors and the
increased likelihood of respondents being able to recall and comment on the quality of 473
service they receive. Data were collected via a self-administered questionnaire sent by
mail to each respondent. The total number of usable responses was 1,268 representing
a response rate of 30 per cent. The final sample was representative of the total
population based on demographic criteria (see Table I for characteristics of the
sample).

Measures
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The measures used in our analysis were derived from existing published studies.
Where appropriate, the wording of the items was adapted to suit the context of our
study. All scales used a Likert-type scoring format ranging from 1 (“strongly
disagree”) to 7 (“strongly agree”). A full list of scale items and their measurement
properties is presented in Table II.
Technical service quality refers to the outcome-related aspects of the service (e.g.
quality and accuracy of advice, providing a high return on investments). The four-item
scale was particularly relevant to our study as it was developed specifically to measure
technical service quality in the financial services industry (Sharma and Patterson,
1999). Scale items captured the extent to which the organisation provided a quality
outcome in terms of financial portfolio performance and security of investments.
Functional service quality is defined as the process-related elements of service
delivery (e.g. accessibility, professionalism, empathy of service providers). We
employed a five-item scale drawing from the process dimensions of Hartline and
Ferrell’s (1996) perceived service quality scale. This scale was particularly appropriate
to our study for its specific focus on employee-related aspects of service quality. The
items captured the extent to which the advisor provided a courteous and attentive
service and empathised with the client’s circumstances.
Customer education is the extent to which advisors provide customers with the
skills and abilities to utilise information (Burton, 2002). We adapted a four-item,
communication effectiveness scale (Sharma and Patterson, 1999) that captures the
extent to which advisors explain complex concepts to clients and provide appropriate
information to aid clients’ understanding of the core service performance provided.

Gender % Age group % Relationship duration %

Male 84.0 18-30 years 0.4 , 1 year 1.1

Female 16.0 31-45 years 8.8 1-5 years 33.1
46-65 years 50.0 5-10 years 31.1
66-80 years 35.5 10-15 years 13.3
81 þ years 5.3 15-20 years 10.2 Table I.
20 þ years 11.2 Sample characteristics
100.0 100.0 100.0 (n ¼ 1; 268)
 EJM
Constructs Factor loading t-value
41,5/6
Technical service quality
My advisor has assisted me to achieve my financial
goals 0.90 61.07
My advisor has performed well in providing the best
474 return on my investments 0.96 76.53
My advisor has helped me to protect my current
position by recommending the best investing options 0.94 72.34
My advisor has performed well in investing my money
in appropriate investment options 0.95a –

Functional service quality

b
My advisor’s behaviour instils confidence in me –
My advisor is courteous 0.64 25.46
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My advisor gives me personal attention 0.81 35.77

My advisor has my best interests at heart 0.86a –
I can share my thoughts with my advisor 0.81 35.78

Customer expertise
I can understand almost all the aspects of the services I
purchase from my advisor 0.66 27.34
I possess good knowledge of financial planning services
and products 0.95a –
I can understand my advisor’s techniques and
b
strategies –

Customer education
My advisor keeps me very well informed about what is
going on with my investments 0.83 36.14
My advisor explains financial concepts and
recommendations in a meaningful way 0.87 38.36
My advisor always offers me as much information as I
need 0.85 37.34
My advisor always explains to me the pros and cons of
the investment he/she recommends to me 0.82a –

Customer loyalty
I will invest more funds through [Business Name] in the
future 0.63 26.16
The chances of me staying in this relationship are very
good 0.87 27.19
The likelihood of me trying other [Business Name]
services is very good 0.92 23.75
I try to use [Business Name] for all my investment needs 0.76a –

Switching costs
By continuing with [Business Name], I receive particular
privileges I would not receive elsewhere 0.82 24.34
A lot of energy, time, and effort have gone into building
Table II. and maintaining the relationship with my advisor 0.72a –
Results of confirmatory a b
factor analysis Notes: Item was fixed to 1 to set the scale; Deleted item
 We regard customer expertise as the extent of a customer’s product knowledge and The paradox of
ability to assess product performance. This construct measures a consumer’s customer
market-related investment expertise rather than expertise with a particular financial
service provider per se. It was gauged using three items of a four-item scale developed education
by Sharma and Patterson (2000). While Sharma and Patterson’s (2000) scale was
designed to measure product-norm experience, which is often considered conceptually
distinct from expertise (Alba and Hutchinson, 1987), we believe the three items we have 475
taken from the scale capture customer expertise appropriately. Sharma and Patterson’s
(2000, p. 475) definition of product-norm experience (“prior product knowledge and
information about how a product would perform”) is conceptually similar to
established definitions of expertise (e.g. Brucks, 1985; Sheth, 1999) that emphasise
understanding and knowledge as key elements of expertise. Furthermore, the three
items we selected measure specifically customer understanding and knowledge. We
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dropped one item (“I am quite experienced in this area”) for its singular focus on
customer experience.
Finally, customer loyalty is defined as customers’ intentions to stay with, and level
of commitment to, the organisation. We used a four-item scale adapted from Boulding
et al.’s (1993) behavioural intentions scale and the loyalty dimension of the behavioural
intentions scale used by Zeithaml et al. (1996). Slight changes in wording of some items
were required to fit the financial services context.

Control variables
We controlled for client age, gender, and relationship length and perceived switching
costs that are independent of expertise. Age and gender have been shown to moderate
the relationship between satisfaction and loyalty (Mittal and Kamakura, 2001).
Previous research has also suggested that information processing styles differ by
gender (Meyers-Levy and Sternthal, 1991). Women, for example, have been suggested
to be more risk-averse than men (Wallach and Kogan, 1959; Holbrook, 1986), which
may potentially have an impact on the way complex information is processed and
understood and how it subsequently affects the loyalty decision. Furthermore, older
customers due to their greater accumulation of wealth over time may demonstrate
differences in loyalty due to the accumulation of switching costs and a degree of inertia
(Huang and Yu, 1999). We controlled for relationship length for similar reasons. In
other words, relationship length might serve as a proxy for customer inertia, which
would be associated with greater loyalty (Colgate and Lang, 2001). Gender was
indicated as male (1) or female (2). Age was indicated by the following five categories;
18-30, 31-45, 46-65, 66-80, and 81 þ , while relationship length was measured by asking
customers how long (in years) they have held an account with the firm.
Finally, we controlled for perceived switching costs that were unrelated to expertise
(e.g. relational and financial switching costs) (Burnham et al., 2003). Despite feeling
confident enough to leave the firm as a result of high expertise, customers may feel tied
to the firm through the existence of these costs[1]. We measured non-expertise related
switching costs using two items adapted from Jones et al. (2002) (see Table II).

Measure validation
We conducted exploratory and confirmatory factor analysis (CFA) in order to test for
convergent validity. In arriving at the final set of items for each construct, we deleted
 EJM measures from the initial battery of items based on the following statistical and
41,5/6 theoretical grounds. First, from a statistical standpoint, the item-total correlation was
considered and values that were well below other item-total correlations (e.g. , 0.40) or
had cross-loadings on other scales (e.g. . 0.40) were earmarked for deletion. Second,
based on initial CFA results, any item that loaded less than 0.50 on its intended
construct were also considered candidates for deletion. On the basis of these tests, one
476 item from the functional service quality and one from the customer expertise scale were
deleted. We verified that the deletion of these items would not change or harm the
intended meaning of the constructs of which they were a part.
Next, we employed a set of established procedures to check for discriminant validity
(Anderson and Gerbing, 1988; Bollen, 1989; Fornell and Larcker, 1981). Discriminant
validity was assessed by calculating the average variance extracted (AVE) for all pairs
of constructs and comparing this value to the squared correlation between the two
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constructs of interest (Fornell and Larcker, 1981). Discriminant validity is satisfied

when the squared correlation between any pair of constructs is less than the respective
AVE of each of the constructs in the pair (Fornell and Larcker, 1981). Table III shows
the reliability coefficient of the constructs and correlations between constructs
employed in this study. Overall, the results of the confirmatory factor analyses
indicated that the measurement models provided very good fit to the data
(x2ð0 155Þ ¼ 899:72, GFI ¼ 0:93, TLI ¼ 0:96, CFI ¼ 0:96, RMSEA ¼ 0:06). The results
of the CFA with factor loadings and t-values are summarised in Table II.
In order to test for presence of common methods bias, we considered the results of
an exploratory factor analysis on the final 20 items. This resulted in six factors with
eigenvalues greater than 1.0, which explained 72 per cent of the total variance. There
was no general factor in the unrotated factor structure (Podsakoff and Organ, 1986)
that suggest that common method bias was not a significant concern for our study.

Hypothesis testing
We tested our hypotheses using moderated hierarchical regression analysis. All scales
were averaged to form a composite before conducting the analysis in three steps (i.e.
three models). In Model 1 we regressed the dependent variable on control variables
only. Model 2 included control variables plus the hypothesised main effects. Finally,
model 3 included control variables, main effects, plus the hypothesised interaction
terms. All main effects variables were mean-centred to minimise the threat of
multicollinearity in equations where interaction terms were introduced (Aiken and
West, 1991). We tested for collinearity among variables by calculating the variance
inflation factor (VIF) for each of the regression coefficients. Calculations of VIF ranged
from a low of 1.00 to a high of 3.38. These were well below the recommended cut-off
figure of 10 (Neter et al., 1985).
In order to test for the main effect of customer education on customer expertise and
the hypothesis that expertise would partially mediate the relationship between
customer education and loyalty, we conducted another set of regressions based on the
guidelines established by Baron and Kenny (1986). One-tailed tests for significance are
used for the hypothesised main, and interaction effects due to the theoretical rationale
presented in earlier sections. A two-tailed test, on the other hand, is applied to
non-directional associations (i.e. between control variables and other variables in the
model) (Robinson, 1988). In addition, unstandardised coefficients are reported as they
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1 2 3 4 5 6 7 8 9 10 11

1. Customer loyalty
2. Technical service quality (TSQ) 0.75
3. Functional service quality (FSQ) 0.64 0.71
4. Customer education 0.68 0.78 0.78
5. Customer expertise 0.15 0.16 0.19 0.18
6. Switching cost 0.68 0.62 0.55 0.60 0.15
7. Gender 0.15 0.15 0.07 0.11 2 0.13 0.16
8. Age 0.28 0.27 0.23 0.20 0.01 0.27 0.07
9. Relationship length 0.17 0.12 0.09 0.06 0.12 0.12 0.02 0.33
10. TSQ £ customer expertise 2 0.05 20.09 20.12 20.10 2 0.09 2 0.03 20.03 0.02 0.03
11. FSQ £ customer expertise 2 0.11 20.10 20.26 20.17 2 0.15 2 0.10 20.03 20.01 0.01 0.75
Mean 5.20 4.84 6.06 5.43 5.39 4.97 1.15 3.37 11.47 – –
Standard deviation 1.30 1.54 0.97 1.23 1.20 1.42 0.36 0.75 10.10 – –
Cronbach’s alpha 0.86 0.97 0.85 0.91 0.79 0.74 – – – – –
Composite reliability 0.88 0.97 0.86 0.91 0.80 0.75 – – – – –
Average variance extracted 0.64 0.88 0.62 0.71 0.67 0.60 – – – – –
Notes: Correlations greater than 0.06 are significant at the 0.05 level; Correlations greater than 0.08 are significant at the 0.01 level
customer

and descriptive statistics

Correlations, reliabilities,
education

(n ¼ 1; 268)
Table III.
477
The paradox of
 EJM are not affected by changes in the means or zero points of the variables nor by the
41,5/6 addition of arbitrary constants to the variables in the model (Allison, 1977).

Results
The results of the regressions of customer loyalty on the control, main, and interaction
effects are presented in Table IV. Customer loyalty was found to be positively and
478 significantly related to technical service quality (b ¼ 0:36, p , 0.001), functional
service quality (b ¼ 0:13, p , 0.001), and customer education (b ¼ 0:12, p , 0.001)
lending support to H1, H2, and H3, respectively. Contrary to expectations, however,
customer expertise was not negatively related to customer loyalty (b ¼ 0:00, p . 0.05)
meaning that H5 is not supported.
The results of the regressions testing for the partial mediation by expertise of the
customer education-loyalty relationship are presented in Table V. Customer education
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was found to be positively associated with customer expertise (b ¼ 0:07, p , 0.05)

lending support for H4. The main effect of customer education on loyalty was
significant; however it did not diminish when customer expertise was entered into the
third equation. In other words, the conditions for partial mediation were not satisfied
(Baron and Kenny, 1986).
Finally, the positive and significant interaction coefficient between technical service
quality and expertise (b ¼ 0:04, p , 0.05) implied that the positive effect of technical
service quality on consumer customer loyalty was indeed stronger when customer
expertise was high, lending support for H6a. Conversely, and consistent with
expectations, the interaction term between functional service quality and customer
expertise was significant and negative (b ¼ 20:04, p , 0.05) indicating that the
positive relationship between functional service quality and customer loyalty is
diminished as customer expertise increases. This lends support to H6b.

Discussion
The finding that both technical and functional elements of service quality were both
positively associated with customer loyalty is in line with our expectations and largely
confirms findings from previous research (Bloemer et al., 1999; Wong and Sohal, 2003).
Clients of financial service organisations look to both the performance of the core
product and the process by which it is delivered in forming their intentions to be loyal.
Given the high involvement nature of these services and the significant risk associated
with their purchase, it seems reasonable that technical service quality had a relatively
stronger relationship with customer loyalty than functional service quality.
The positive and significant relationship between customer education and customer
loyalty was also positive and significant as expected. Clear explanations of financial
concepts and the provision of essential information would be perceived as service
augmentations by clients. Client education is consistent with notions of relationship
selling (Weitz and Bradford, 1999) where the sales process is more about partnership
building with customers than the “hard sell” (Beverland, 2001). And the process is
likely to be iterative with customers “testing” their knowledge and assumptions about
the management of their finances with their advisor – effectively seeking reassurance
about the decisions they are making (Harrison, 2002). This process is likely to increase
the bond between the client and the firm.
 The paradox of
Dependent variable: Model 1 Model 2 Model 3
Customer loyalty b t-value b t-value b t-value customer
Control variables
education
Age group 0.14 * * * 3.58 0.06 1.70 0.05 1.65
Relationship length 0.01 * 3.06 0.01 * 3.08 0.01 * 3.05
Gender 0.16 * 4.96 0.11 1.72 0.11 1.69 479
Switching costs 0.59 * * * 29.36 0.26 * * * 12.78 0.26 * * * 12.57

Main effects
Technical service quality (TSQ) 0.34 * * * 13.77 0.36 * * * 13.90
Functional service quality (FSQ) 0.14 * * * 3.59 0.13 * * 3.17
Customer education 0.12 * * * 3.60 0.12 * * * 3.60
Customer expertise 0.00 0.09 0.00 0.09
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Interactions
TSQ £ customer expertise 0.04 * 2.08
FSQ £ customer expertise 2 0.04 * 2 1.70
R2 0.46 0.64 0.65
F-model 268.51 * * * 288.06 * * * 236.33 * * *
DR 2 0.51 0.01
DF 166.40 * * * 2.58 *
Table IV.
Notes: Unstandardised coefficients; *p , 0.05; * *p , 0.01; * * *p , 0.001 (one-tailed test for Hierarchical moderated
hypothesised relationships; two-tailed test for controls) regression results

Equation 1 (dependent Equation 2 Equation 3

variable: customer (dependent variable: (dependent variable:
expertise) customer loyalty) customer loyalty)
b t-value b t-value b t-value

Control variables
Age group 20.09 22.18 0.06 1.82 0.06 1.70
Relationship length 0.01 * * * 4.11 0.01 * 3.15 0.01 * 3.08
Gender 20.42 * * * 25.24 0.09 1.46 0.11 1.71
Switching costs 0.05 1.75 0.26 * * * 12.85 0.26 * * * 12.78
Technical service quality 20.01 0.29 0.33 * * * 13.62 0.34 * * * 13.77
Functional service quality 0.15 * * 2.96 0.14 * * * 3.64 0.14 * * * 3.59

Main effects
Customer education 0.07 * 1.65 0.12 * * * 3.57 0.12 * * * 3.60
Customer expertise 0.00 0.09 Table V.
R2 0.08 0.64 0.65 Test of customer
F-model 15.41 * * * 329.77 * * * 288.06 * * * expertise as a mediator of
the customer
Notes: Unstandardised coefficients; *p , 0.05; * *p , 0.01; * * *p , 0.001 (one-tailed test for education-loyalty
hypothesised relationships; two-tailed test for controls) relationship
 EJM The positive and significant relationship between customer education and customer
41,5/6 investment expertise was expected. Financial advisors are in a unique position to
influence what a client learns about financial services (Harrison, 2002). As noted
earlier, financial services are often highly complex and high in both experience and
credence properties. The behaviour of customer contact personnel (i.e. financial
advisors), and the information and explanations they provide, will be especially
480 important for customers’ understanding of the product and their mitigation of
perceived risks (Ennew and Binks, 1999).
The finding that high expertise was not negatively related to customer loyalty was
unexpected although there are some possible explanations for this result. The first
explanation derives from the number and quality of competitive alternatives.
Customers’ high overall assessments of service quality (i.e. MTSQ ¼ 4:84, MFSQ ¼ 6:06)
might indicate that they were already receiving superior service quality relative to
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competitors, and that expert clients had decided to stay with the focal firm despite a
considered assessment of competitors.
A second, somewhat compatible, explanation derives from recent findings that
when service performance is high, high-familiarity customers express greater levels
of satisfaction and behavioural intentions than do less familiar customers
(Söderlund, 2002). The suggestion is that expert clients are in a better position to
assess when a superior service has been delivered. This is consistent with the
view that customers – through education, experience and accrued expertise – are
better able to appreciate the subtleties of service they receive (Stepanek, 1980).
A final possibility is that the expertise accrued by customers was, to some
extent, firm specific. Although the items employed to measure both education and
expertise were phrased as generally as possible (i.e. to avoid measuring
firm-specific education and expertise), it is highly likely that some of what clients
learn is idiosyncratic to the firm to the extent that slight differentiation exists
between organisations in terms of product attributes, advisor language and style,
and procedures.
The findings for the moderating effects of customer expertise suggest that clients
with high expertise rely more heavily on technical service quality than functional
service quality in forming their intentions to remain loyal to the organisation.
Consistent with our expectations and extant literature (Sharma and Patterson, 1999;
Söderlund, 2002), those with high expertise are capable of more elaborate information
processing (Alba and Hutchinson, 1987). In other words, expert clients are able to
assess the outcomes associated with the service more confidently (e.g. soundness of
advice, portfolio performance relative to competitive alternatives). Clients with limited
expertise, on the other hand, are relatively more reliant on the credence attributes of the
service (e.g. friendliness and professionalism of advisors) in determining their intent to
stay with the firm.

Managerial implications
Customer education in the financial services industry has received greater attention
from regulatory bodies in recent years. The Financial Services Authority (FSA) in the
UK, for example, designates customer education as key element of their charter
(Harrison, 2002). The results of this study imply that there is an opportunity for
organisations to engage in similar initiatives. Potentially a number of managerial
 implications follow from this research; two areas, however, stand out. The first is that The paradox of
financial service firms should integrate customer education into their relationship customer
marketing philosophy. The second is to be aware of the changing nature of customer
perceptions as education contributes to customer expertise over time. education
Turning to the integration of the customer education into relationship management
initiatives, firms might consider opportunities to equip financial advisors with the
skills to explain complex financial concepts to customers in a simple and compelling 481
manner. More importantly, though, advisors should be provided the autonomy or
behavioural latitude within their jobs to take the time to explain concepts to customers
(Bell and Mengüç, 2002). Too often the pursuit of laudable goals and objectives are
frustrated by overly constrictive job designs and incompatible reward structures
(Kerr, 1975).
Firms should also look to ways of eliciting customer involvement in the education
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process (Prahalad and Ramaswamy, 2000). It is likely that education initiatives will be
more successful where advisors have a good understanding of the “gaps’ in clients’
knowledge. For example, in establishing relationships with new customers, advisors
might interview and record clients’ past investment experiences and history for use in
future interactions. This would enable the customisation of information, explanations
and advice to suit the specific needs and capabilities of customers.
A second major implication is that firms need to view relationships with customers
as dynamic. Customers will change the way they view, and engage with, the service
over time. In the context of our study, increasing customer education and hence
expertise will lead to customers focusing increasingly on technical elements of the
service offering. Education initiatives should develop accordingly. Burton (2002), for
example, suggests that as a customer’s expertise increases, the simple provision of
information will be more appropriate than in-depth education efforts. The type of
information provided should also change as customer expertise increases. Expert
clients may increasingly value detailed information about their investment portfolio,
additional insight into the advisor’s decision-making process, and more opportunities
for co-production. The on-line interface might provide an ideal forum for responding to
increasing levels of customer expertise (i.e. allowing the targeted provision of technical
information). This concept could be extended to the design of different “tiered” service
packages that allow expert customers more insight into, and involvement with, the
service.

Limitations and directions for future research

The first and most significant limitation of this study is the cross-sectional nature of
the data. Some of the elements of the model (e.g. the customer education – customer
expertise relationship) would greatly benefit from a longitudinal investigation.
Customer expertise is something that develops over time and it is also likely that the
rate of customer learning will be non-linear. In other words, novice customers are likely
to learn relatively more over a given period of time than more expert customers. These
effects are only likely to be observed with a longitudinal research design.
While we have elected to prioritise the minimisation of systematic and random noise
attributable to industry differences (McKee et al., 1989; Voss and Voss, 2000), clearly
the ideas in this study would benefit from varying sampling procedures and replication
in alternative settings. For example, in less complex service industries (e.g. hairdressing),
 EJM the role of customer education in building customer loyalty and expertise is likely to be
41,5/6 less important; indeed the notion of customer expertise may have little or no
implications for customer loyalty (Burton, 2002).
It should be stressed that this model was not an attempt to understand all possible
influences and contingencies relevant to the role of customer education in the customer
expertise-loyalty relationship. Accordingly, it is likely that some additional variables
482 might help explain key relationships further. As noted above, the non-significant
relationship between expertise and loyalty might be due to the competitive landscape
and the availability of alternatives. Measuring and controlling for such aspects of the
service context might have offered additional insight into the customer
expertise-loyalty relationship.

Conclusion
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In a recent editorial, Harrison (2002, p. 7) suggested that in financial services, “there is a

need to gain a better understanding of the respective roles of information and advice in
consumer decision making”. While there is a significant amount of research on
customer knowledge and expertise, there is relatively less understanding of how
customers acquire such knowledge. We believe our study has responded in a
meaningful way to this call. Although further replications of, and modifications to, our
model are undoubtedly required, we hope that it has shed some additional light on the
subject of customer education, its impact on customer expertise and, ultimately, on the
way in which service quality is perceived.

Note
1. The authors thank a reviewer for this suggestion.

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Corresponding author
Simon J. Bell can be contacted at: s.bell@jbs.cam.ac.uk

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