Retirement advisors labor to rebuild trust

Many retirement accounts that took a hit in the Great Recession are back on track, but those dark days left a lingering, hard-to-erase legacy: an erosion of the trust that investors had placed in their financial advisors.

The problem – aggravated by scandals involving rogue trading, rate manipulation and insider trading – crops up every time there’s a financial meltdown. This time, it appears especially pronounced among middle and lower-income workers who tell surveyors they simply do not believe their financial advisors are working with their best interest in mind.

The latest CFA Institute/Edelman Investor Trust Study found only half (53 percent) of investors trust investment management firms to do what is right. Worse results can be seen in the Forgotten Investor Survey, a poll of retail investors by State Street Corp., which found that financial advisers are trusted by a mere 15 percent of respondents.

The good news is that many in the industry have taken notice (as they tend to whenever credibility and reputations are called into question). What choice do advisors have? None, really, not if they want to stay in business.

The clear-eyed thinkers on the topic know the problem can only be resolved by pushing further to eliminate conflicts of interest – real and perceived – becoming even more transparent and, yes, even more regulations.

The advice advisors need to hear sounds a bit like a Boy (or Girl) Scout oath:

Be honest. Put your clients’ interests ahead of your own. Communicate, communicate, communicate. Adhere to the highest ethical standards.

Many advisors have been managing their practices in just this way from the very beginning. Too many others, unfortunately, have not.

Susan Fulton, president and founder of FBB Capital Partners in Bethesda, Md., says she believes the problem is mostly rooted in those everyday conflicts of interest that are so pervasive in the securities industry.

The industry, she notes, is highly competitive and chock-full of incentives tied to achieving sales goals. This, Fulton said, is what seriously undermines the advisor/client relationship.

Of course, very few people can resist the pull of additional money.

“If there is a conflict of interest, at some point in time it will be triggered,” Fulton said, sounding a bit philosophical. “It won’t be triggered because they (advisors) are bad people, although some of them are. It will be triggered because they are human. Human beings are fallible and do put their own interests first.”

In Fulton’s opinion (and in the view of many others), the only solution to this is to be hyper-transparent about which products pay advisors a commission.  

In her shop, Fulton doesn't represent any particular investments or insurance products. She doesn't earn commissions for pitching certain companies' investments. Hers is a fee-based operation.

Of course, many advisors are fee-based nowadays and have been so for years. Rather than receive a commission for the recommendations they make to client, they charge a set advisory fee. The client knows what they will be paying upfront.

Fee-based advisors, however, tend to work with the wealthy, not middle-class earners. That means the bulk of Americans are still working with an advisor who relies on a commission to make a living.

In any case, Fulton also believes fee-based advisors need to be more transparent about their charges and why they chose certain investments for their clients.

Becoming transparent

The bottom line, according to Robert Stammers, director of investor education for the CFA Institute, is that advisors need to work hard to build trust as a business competency.

“The industry has a long way to go in order to build the same kind of trust other industries have built with consumers,” he said.

It sure does. According to the CFA/Edelman study, the financial-services industry is the least-trusted industry among the general population, falling in behind telecommunications, automotive and pharmaceutical.

Perhaps ironically, trust is eroded because most investors just assume their advisors are acting in their best interest and so are shocked when things don’t turn out the way they expected.

“They expect them to be transparent about their business activities, to communicate often and clearly and to make investment management less complex, more simple,” Stammers said.

The importance of greater transparency can hardly be overstated.

Charles Schwab recently surveyed 1,000 affluent Americans who receive some form of financial advice for its report, “Advice and the Affluent Investor: A Study of Attitudes and Behavior.” Not surprisingly, it found that trust and transparency are cornerstones of building relationships. An overwhelming majority of those surveyed said they want transparency around how their advisor is compensated.

This, as advisors know, is where regulation comes in.

Rules and regulations

Fee disclosure rules were put into place last year requiring defined contribution plan providers to be more transparent to their plan sponsor clients about the fees they charge. Plan sponsors now also are required to inform plan participants about the fees they are being charged within their retirement accounts.

Looking ahead, the U.S. Department of Labor will soon release its new rules regarding who is a fiduciary. Its initial proposal included financial services people who work with IRAs and broker-dealers, who have not been considered fiduciaries in the past.

There are also new rules that regulators are drawing up on lifetime income illustrations.

“I’m very much for regulation by Congress or suitable authorities,” said Fulton. “I don’t think regulation hurts at all.”

She pointed out that oftentimes, those earning the most are the ones squawking the most about how regulation is too expensive.

“They’re not kidding me. We watched what they did without regulation. They were all telling us everything was hunky-dory,” she said.

And, as everyone now knows, that just didn’t help build trust.

 

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