Why investors fear their advisers

The series of scandals following the financial meltdown clearly has left an impression on the investing public.

In a study set for release today, mid- and late-career investors 28 to 64 said that getting ripped off by their financial advisers is their biggest fear. Nearly 60% of the 4,000 investors who responded to the poll said that getting scammed is their top fear, according to Hearts and Wallets’ Quantitative Panel 2010.

Likewise, almost half of investors near or in retirement said that they too are afraid of being cheated by their financial professionals.

“The industry needs to be asking itself if this is something they feel good about,” said Laura Varas, a principal with Hearts and Wallets.

As a result of this mistrust, more investors are defining themselves as “self-directed,” according to the survey. Fifty-four percent of respondents identified themselves as self-directed investors, up from 29% in 2008.

Similarly, 38% of pre- and post-retirees said that they are self-directed, up from 36% in 2008.

Although this movement should be a red flag for advisers, it doesn’t mean that investors are fleeing full-service firms in favor of doing everything on their own through discount brokers, Ms. Varas said.

“This is more about investors’ wanting to understand what is going on, and ultimately making their own investment decisions,” she said. “But many of them are still looking to advisers.”

In fact, the study found that seven of 10 investors surveyed use a financial professional. One-third of investors who use full-service advisory firms consider themselves, not their advisers, their primary source of investment advice.

Investors trust advisers more if they feel understood by them, and if their advisers are able to explain things clearly, Ms. Varas said.

Email Jessica Toonkel at [email protected].