Despite the markets recent volatility, 79 percent of advised investors say that professional advice is worth more than it costs, according to a new survey.
The survey, by Envestment, a provider of wealth management products to the advisory industry, found that 87 percent of survey respondents said their financial advisor "always acts with my best interests at heart" and only 12 percent believe their advisor did not adequately explain the market risks.
Sixty-two percent of advised investors say their portfolio has done better over the past two years compared with most people they know. Only 12 percent of advised investors said their advisor "did not explain the risks of the market as well as he/she should have."
But as strong as individual investor-advisor relationships are, market turmoil has taken a toll. Seventy-three percent of investors say that the market and economic turbulence of the last two years has left them increasingly cynical about the financial services industry.
Individual relationships have weathered the market storm, but there is no question that overall the financial services industry has taken a reputational hit, said Envestnet president Bill Crager in a statement. While investors generally feel well served by their financial advisors, the extreme market disruptions of the last two years have provoked investor concerns about the integrity of the financial services industry and of the markets alike.
It's not only investors who believe that advisor-investor trust needs some reinforcement. Most financial advisors polled by Envestnet said they agree that while they look after their clients' best interests, a lot of other financial advisors do not. And - while they grade themselves highly on explaining their professional responsibility to clients - advisors give other financial advisors a "C" when it comes to this attribute.
Advised investors are generally complimentary of their financial advisors. When asked to grade their advisor on key relationship attributes, just under three-quarters (74 percent) award their advisor an "A" for integrity, 65 percent give them an "A" for availability and responsiveness, and more than half give that mark for "looking out for me" and "focusing on (my) goals."
At the same time, investors and advisors alike are confused on how and when professional standards of responsibility - the so-called "fiduciary standard" - apply to financial advisors.
Thirty-six percent of the investors polled by Envestnet say that to the best of their knowledge, all financial advisors are subject to the same obligation to act in their clients' best interests; 32 percent say they are not sure. Even 44 percent of advisors believe there is one standard for all advisors. (In fact, only registered investment advisers, or RIAs, are currently subject to the fiduciary standard to act in clients' best interests; brokers are generally subject to the less stringent transactional suitability standard).
The issue of advisors' professional responsibility has been under scrutiny for months, with Congress weighing a proposal to make all financial advisors subject to a formal fiduciary standard as part of pending legislation for financial services industry reform.
"Even as legislators at the national level debate whether all financial advisors should adhere to a uniform professional standard, it's clear that the great majority of investors - as well as many financial professionals - don't know how to accurately define the scope and nature of a financial advisor's responsibility to his or her clients," said Crager.
Financial advisors and investors generally agree that external factors such as high profile scandals like Bernie Madoff and the market collapse of 2008-2009 have been big factors in shaping a heightened focus on professional responsibility.
But investors - to a much greater degree than financial advisors - cite too much loss of investor wealth (cited by 57 percent of investors vs. 37 percent of financial advisors), growing investor empowerment (57 percent vs. 18 percent), and personal satisfaction notwithstanding, a loss of trust in financial advisors generally (58 percent vs. 34 percent) as major reasons why financial advisor responsibility is now under such close examination.
"Investors' perceptions of the fiduciary debate and of the underlying factors - from a loss of trust to a growing sense of empowerment - are telling," Crager said. "It's clear that investors have a growing appetite for advisory relationships built on a platform of mutual trust and respect between client and advisor."
As high as clients rank their financial advisors on many relationship qualities, it also is clear that for many investors, the overall issue of fees and compensation remains a sticking point.
When asked to grade their financial advisors on specific attributes, clients score advisors least highly on "transparency of fees"; just 40 percent of advised investors say their financial advisor is very clear on how they are compensated; and 37 percent believe their financial advisor should provide more information/greater detail on compensation.
Advised investors strongly agree (75 percent) that "financial advisors should not receive hidden incentives to choose one investment over another for their clients." But at the same time, more than half of advised investors agree they cannot assess well whether their advisor gets such incentives. Nor can many assess well how their financial advisor gets paid (43 percent) and whether or not there are any hidden fees (46 percent).
"Something is getting lost in the discussion between advisors and clients about fees and expenses," Crager said. "It's hard to build a foundation of trust if an investor feels that a financial advisor is withholding certain information. Advisors need to redouble efforts to help their clients understand and feel comfortable with what they're paying."
Concerns and/or lack of clarity over advisor compensation are also major factors inhibiting many investors from engaging a professional financial advisor. The survey found that among investors not working with a financial advisor, financial advisors were deemed less likely than auto mechanics, physicians, contractors or real estate agents to be "open about fees, expenses and what they are doing for the money."
The Envestnet survey suggests that investors are keenly interested in better understanding the professional responsibilities and obligations of financial advisors - and would look favorably on advisors who take steps to communicate that responsibility, regardless of whether a uniform professional standard is legislatively imposed.
While most investors said they were not familiar with the details of the fiduciary standard debate, an overwhelming majority of the investors surveyed (98 percent) would support a regulation that held all financial advisors to the same standard of client service, and 63 percent said that a universal fiduciary standard would increase their confidence in the value of an advisory relationship.
But most investors (69 percent) also believe that fiduciary responsibility cannot be legislated - and that "you must rely on the advisor's integrity."
"Regardless of how the regulatory discussion is resolved - or even if it remains unresolved - there is a clear opportunity for financial advisors to strengthen relationships and client loyalty by demonstrating their dedication to doing what they believe is best for every client," Crager said.
Nearly three-quarters of advised investors said they would have more confidence in a financial advisor who offered a "bill of rights" specifying what the client is entitled to and how the advisor works.
However, only four in 10 advised investors say their financial advisor has ever formally explained their fiduciary responsibility to them. And only about one-third of financial advisors say they have a formal "code of conduct" that they discuss with clients in addition to what's required from a fiduciary standpoint.
"Investors aren't holding their collective breath waiting for new legislation, and they don't believe that new regulation is the only meaningful response to the issue of advisory responsibility," Crager said. "Fundamentally, investors believe that when it comes to encouraging confidence and trust, what occurs in the interaction between financial advisor and client is far more important than what a regulation says."
But relationships are a two-way street, and just as financial advisors need to do a better job communicating their responsibility to clients, the survey indicates that investors also need to step up their communication. Just five percent of advised investors strongly agree that over the past 18 months they have asked more questions regarding their financial advisor's fees and compensation and less than a quarter (21 percent) say they have substantially increased the extent to which they talk to their advisor about their goals.
"The research represents a call to action for investors and financial advisors alike," Crager said.
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