Investors lack trust and confidence in the financial services industry, suggests the recently released results of a survey sponsored by the independent investor advisory panel (IAP) of the Ontario Securities Commission (OSC).
And, coincidentally, the CFA Institute has just published a set of principles designed to restore confidence in the industry by guiding investors to demand fair treatment in a variety of areas.
The IAP survey explored the perceptions of more than 2,000 investors in Ontario concerning information and advice regarding investment products. Two findings shine the spotlight on the skeptical feelings of many investors: although the survey found that investors generally trust their financial advisors, a scant 20% of investors “strongly agree” that they trust their advisors’ advice. In addition, about two-thirds of respondents believed the way in which advisors are paid affects their recommendations; 25% of respondents strongly agreed that this practice takes place.
Other highlights of the IAP study indicate that investors want strengthened regulation of financial advisors, including clearer professional standards regarding the use of the title, rigorous education requirements and ethics training, and stricter regulatory enforcement of the rules.
The IAP report stresses that advisors need to give their clients a stronger sense that their best interests are being served. The survey found that 93% of respondents would like a statutory “best interest” duty toward investors to be imposed on advisors; 59% of respondents strongly agreed.
“An investor/advisor power imbalance exits for most, but is particularly problematic for those who lack confidence in their financial literacy,” says the survey report’s summary. “This places advisors in a powerful position.”
Most rely on advisors
The IAP survey found that the majority of investors (58%) rely on their advisors as their main source of information, but four in 10 don’t know how their advisor is being paid and 50% of investors reported that they had not been told how their advisor is paid. Only 11% of respondents describe themselves as “very confident” in their financial literacy. The survey found confidence is lower among both female investors and investors younger than 35 years old.
The CFA Institute’s “statement of investor rights” (SIR), for its part, may help to restore investor confidence. The SIR’s principles were developed to advise investors on the conduct they should expect to receive from their advisors.
The SIR principles include: disclosure of any existing or potential conflicts of interest; an explanation of fees and costs charged to the client; confidentiality; appropriate and complete record-keeping; independent and objective advice based on informed analysis; prudent judgment and diligent efforts; and clients’ interest taking precedence over those of the advisor and his or her firm.
Clients are entitled to clear, accurate and timely communication that uses plain language and is presented in a format that conveys information effectively, the CFA Institute’s SIR says. This surfaced in the IAP survey, which found investors want more plain-language, “layperson” product information, as well as improved content and presentation in investment statements to boost understanding.
The CFA Institute’s SIR suggests that investors present the SIR to their advisors, whether the investors are establishing an investment plan, working with a broker, opening a bank account or buying a home: “Demand that your financial professionals abide by these rights and get the service you deserve.”
The CFA Institute’s principles also call upon advisors to support the SIR, suggesting that advisors provide it to clients as a means to show the advisors are committed to fundamental ethical principles and that clients can trust them to provide a high level of service.
The IAP was established in 2010 as an independent body with the mandate to represent the views of retail investors to the OSC in its rule- and policy-making process. The IAP’s chairman, Paul Bates, says the panel’s research will influence the recommendations the IAP makes to regulators regarding investor-protection initiatives, including reforms to mutual fund compensation structures.
Aside from the criticisms of the industry, the IAP survey also found that investors believe their advisors have had a positive impact, with more than half (56%) saying their investment returns are higher because of their advisors and 70% saying they have remained invested throughout volatile periods because of their advisors.
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