Clients trust advisers; advisory firms, not so much

Study finds some confusion over fiduciary duty vs. suitability

Feb 5, 2013 @ 1:05 pm

By Liz Skinner

Advisers are largely gaining client confidence even as financial firms continue to score low in the trust department following years of reports about Wall Street abuse.

In fact, about 66% of investors believe that their adviser must always act in their best interests, compared with just 28% who think financial firms as a whole put clients' interests first, according to a survey by Cerulli Associates Inc. released late last week.

“Investors perceive that, 'My adviser Joe would never steer me wrong,'” said Scott Smith, director at Cerulli.

Certain advisers — those working for insurance companies, midsize brokerages and wirehouses — appear to have been especially successful at forging strong personal relationships and inspiring client trust, Mr. Smith said.

But client understanding that different standards of care exist for financial professionals appears to be at best weak, at worst backwards.

In the survey, 81% of clients of insurance companies and 81% of those from full service brokerages such as Edward Jones or Ameriprise Financial Inc. believe that their adviser must act in the best interests of the client. About 75% of those working with a wirehouse believe that their adviser must follow what the industry knows as fiduciary duty.

In reality, most of these clients likely are owed a suitability standard of care, meaning the investments must be consistent with their best interests but not necessarily “the best” option available, Mr. Smith said.

At the same time, about 65% of clients of independent advisers believe that their adviser must always act in their best interests, according to the survey of U.S. households.

Independent advisers, of course, are most likely to be operating under the higher fiduciary standard of care.

“The personal relationships are more important to investors at this point than the actual government standard,” Mr. Smith said. “We need to get to a place where investors are getting what they already think they are getting.”

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