The on-again, off-again Department of Labor fiduciary rule fiasco of 2018 seems to have fed public misconceptions about whether all financial advisors are required to always act in their clients’ best interest.
Nearly half of Americans (48%) mistakenly believe all financial advisors are indeed required by law to act in their clients’ best interest, according to new survey data from Silicon Valley-based hybrid digital wealth management company Personal Capital.
In its 2019 Financial Trust Report, released March 13, Personal Capital also revealed that 65% of investors who work with a financial advisor incorrectly believe that financial advisors only make recommendations that are in a client’s best interest, a big increase from 46% in 2017.
These findings come on the heels of the years-long public debate between regulatory bodies over the fate of the fiduciary rule that has centered around arguing the definition of “best interest,” which is likely contributing to the increased public confusion.
“While we hope all financial services professionals and firms are working with Americans’ best interests in mind regardless of fiduciary designations, this simply isn’t the case,” said Jay Shah, CEO of Personal Capital. “When it comes to wealth management, anything less than advice that meets the fiduciary standard simply isn’t acceptable. Investors deserve more.”
Bad stuff happens to other people
Investors may expect that some financial advisors have bad intentions, but they assume that they won’t be the ones exploited by bad actors. While nearly one in three Americans surveyed (30%) think a financial advisor is likely to take advantage of a consumer, almost all (97%) trust that their own financial advisor will act in their best interests.
Underscoring the lack of awareness around advisors’ legal obligations to their clients, nearly one in five investors surveyed (18%) were unable to identify if their advisor is a broker/dealer or a fiduciary. The 26% who indicated their advisors are broker/dealers, the Personal Capital report said, might want to reconsider whether they are receiving unbiased financial advice.
When investing their money, the survey found Americans are most likely to trust a Registered Investment Advisor (28%), followed by a big bank/brokerage firm (21%), a local advisory company (14%) and an online platform or mobile application that offers financial advice (8%) with their money, though one in three Americans wouldn’t trust any of the listed options.
“Fiduciaries, such as Registered Investment Advisors, are legally required to act in their client’s best interest,” Shah said. “Brokers, meanwhile, are held to what’s called the Suitability Standard, which only holds them accountable to do what they believe is appropriate for clients, leaving investors vulnerable to conflicts of interest and excessive fees.”
The survey also showed that investors are more loyal to their advisors than their financial institutions. Seventy-one percent of investors indicated they would move with their financial advisor if he or she switched institutions after the institution was involved in a scandal.
In what some may find a surprising twist, Millennials proved to be the most loyal, with 80% indicating their willingness to follow their advisors to a new institution, versus Gen X at 70%, and Baby Boomers at 66%.
Low “Fee IQ” costing Americans
Investors still aren’t informed enough about the fees they pay on their investment accounts. The number of American investors who know the amount of fees they pay on all their investment accounts has risen slightly–up to 44% from 39% in 2017–but still comprises less than half of the population.
Furthermore, one in five clients (20%) reported not knowing how their financial advisor is compensated. Hidden fees can add up to more than $400,000 in an investor’s lifetime, Personal Capital found in its 2017 study examining advisory fees and fund fees at some of the nation’s most well-known firms.
The Personal Capital report presents findings of a CARAVAN survey conducted by Engine among a sample of 2,007 adults comprising 1,004 men and 1,003 women 18 years of age and older. The online interviews took place in December 2018.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
