Transparency takes the top spot in a recent survey of investors and 401(k) participants about the qualities they want in 401(k) advisors, followed by high ethical standards and a focus on returns.
The global survey from the CFA Institute, titled “From Trust to Loyalty: A Global Survey of What Investors Want,” found that investors wanted regular, clear communications about fees and upfront conversations about conflicts of interest. The biggest gaps between what investors expected and what they received related to fees and performance. Clients wanted fees that were structured to align their interests, well disclosed and reflective of the value they were getting from their investment firms.
“The bar for investment management professionals has never been higher,” Paul Smith, president and CEO of CFA Institute, said in a statement. “Retail and institutional investors, as always, crave strong performance, however both groups also demand enhanced communication and guidance from their money managers. Building trust requires truly demonstrating your commitment to clients’ well-being, not empty performance promises or tick-the-box compliance exercises. Effectively doing so will help advance the investment management profession at a time when the public questions its worth and relevance.”
Since 2013, retail investors show a significant increase in trust of the financial services industry–rising from 50 percent to 61 percent. About half the gain is thanks to strong increases in the United States, United Kingdom and Australia. The other half is due to higher absolute trust levels in China, India, Singapore and other countries.
Both retail and institutional investors share the view that financial professionals are falling short on issues of fees, transparency and performance. Among retail investors, the most important actions from an investment firm are that it “fully discloses fees and other costs” and “has reliable security measures.” These even surpass protecting their portfolio from losses. Among institutional investors, “acts in an ethical manner” rated as the most important attribute followed by “fully discloses fees and other costs.”
However, that’s not to say that performance is unimportant–53 percent of retail investors and 60 percent of institutional investors cited “underperformance” as the biggest factor that would lead them to switch firms. This was followed by “increases in fees,” “data/confidentiality breach,” and “lack of communication/responsiveness.”
Forty-five percent of institutional investors and 43 percent of retail investors would leave an investment firm if data security were to be compromised, demonstrating the importance placed on cybersecurity in today’s markets.
The study found that once an issue has triggered an investor to re-evaluate their relationship with an investment manager, the majority–76 percent of retail investors and 74 percent of institutional investors–are likely to leave within six months.
“While an increase in overall trust in the financial services industry is a net positive for financial professionals,” Smith continued, “performance is no longer the only ‘deal breaker’ for investors. They are continuing to demand more clarity and service from financial professionals and, with the rise of robo-advisors, they have more alternatives than ever before. Further, if investment professionals don’t provide this clarity, then regulators may force them to, for better or worse.”
Investors are anxious about global markets, and do not believe their investment firms are prepared.
- Investors revealed a growing anxiety about the state of global finance. Almost one-third of investors feel that another financial crisis is likely within the next three years (33 percent of retail investors/29 percent of institutional investors), with significantly more in India (59 percent) and France (46 percent). In addition, only half of all investors believe their investment firms are “very well prepared” or “well prepared” (52 percent retail investors/49 percent institutional investors) to manage their portfolio through a crisis.
Study reveals key regional differences in what investors value from financial professionals with implications for robo-advisors.
- Looking ahead three years, the majority of retail investors in Canada (81 percent), the U.S. (73 percent) and the U.K. (69 percent) say they will still value the guidance of an investment professional to help them versus having the latest technology and tools.
However, the majority of retail investors in India (64 percent) and China (55 percent) and half of investors in Singapore believe having access to the latest tech platforms and tools will be most important to executing their investment strategy. Sixty-eight percent of retail investors in India and 56 percent in China consider brand to be more important than people when it comes to trust.
“This year’s results show an important split between the needs of investors in more developed economies and those who represent the future of the global financial industry,” said Smith.
The takeaway for financial professionals–investors expect more than just performance.
“Investor demands have become significantly more dynamic,” Smith concluded. “Along with delivering performance, investment professionals must also provide transparency around fees and investment decisions, align their interests with their clients’, and provide robust data security measures. Those investment firms that do strike this balance will engender greater trust among investors which, in turn, will drive growth.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
