Investor confusion about fiduciary duty not likely to be resolved by proposed DOL rule

New study finds that clients believe their financial advisers act in their best interests, even when they aren't required to

May 6, 2015 @ 1:17 pm

By Mark Schoeff Jr.

Investors remain confused about whether their financial advisers are fiduciaries and about the fees they pay for advice, according to a new research by the Spectrem Group.

This confusion could get worse under a recently proposed Labor Department rule that would raise investment advice standards for brokers working with retirement assets in 401(k) and individual retirement accounts.

Feel their financial adviser is a fiduciary

Source: Spectrem Group

Note: Ultra-high net worth: $5 million or more;Millionaire: $1 million to $5 million;Mass affluent: $100,000 to $1 million;

The Spectrum report, which is coming out this week, shows that more than four out of five investors believe that their adviser is a fiduciary or acts in their best interests.

Yet most investors use a full service broker — who must sell investments that are suitable for their clients but not necessarily the lowest cost or commission — and a much smaller percentage use investment advisers, who already must meet the best-interests standard.

Source: Spectrem Group

Note: Ultra-high net worth: $5 million or more;Millionaire: $1 million to $5 million;Mass affluent: $100,000 to $1 million;

“People assume that their adviser is a fiduciary, whether he or she truly and legally is,” said Cathy McBreen, managing director of Spectrem Group and president of Spectrem's Millionaire Corner. “They assume that they're working in their best interests, even if they're not bound to that standard. They just assume [the adviser is] doing the right thing for them.”

Most investors are “very comfortable” with the fees that they're paying, according to the survey. The percentage is lowest among the youngest investors, who are comfortable “in seeking out information” on fees, the report states.

Even though investors are sanguine about their fees, they don't have a grasp on them, Ms. McBreen said. When asked to quantify what they pay, they fumble.

“People don't really understand what they're paying their adviser, even if they say they do,” Ms. McBreen said.

The situation may be exacerbated by the DOL rule, which is designed to reduce conflicts of interest for brokers, including those related to advising clients on rolling over funds from company retirement accounts to IRAs.

The problem, according to the Spectrem report, is that it could result in a flood of disclosures that confuse clients.

“The more paperwork they get, the more they're going to distrust the advisory firms because they think they're trying to hide something,” Ms. McBreen said.

The report recommends that advisers develop an “elevator speech” to guide fee discussions with clients, write one clear document that explains the fees they charge, implement quarterly client account reviews and document any changes made to accounts.

The Spectrem survey was based on a poll of 3,750 investors during the fourth quarter of last year. About 1,000 of the participants had assets, excluding their primary residence, of more than $5 million; 1,500 were millionaires; 1,000 had $100,000 or more in assets and 250 had more than $25 million. Spectrem also conducted eight focus groups of 10 investors each across the country late last year.

The Spectrem report is one of several that have come out in the three weeks since the DOL rule was proposed.

On Tuesday, Pioneer Investments released a survey based on a webinar attended by 875 financial advisers which found that 38% believe the DOL rule would hurt their business and profits, while 27% said it would help their business by “leveling the playing field on retirement advice.”

Additionally, 42% of advisers said the rule would raise the cost of advice and limit it, while 32% said that it would help investors, according to Pioneer.

Last week, the 2015 fi360 Fiduciary Standard Survey of 609 brokers and investment advisers showed that 78% said that fiduciary-duty requirements for brokers would not reduce the availability of investment products or advice. That percentage is up from 68% last year.

The fi360 survey also found that 91% of respondents said that it does not cost more to work as a fiduciary adviser than it does to work as a broker.


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