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2004 U.S. Investor Perception Study: What Investors Should Know About Investor Protections Offered by Providers of Fee-based Financial Advice
INTRODUCTION
The businesses of brokerage firms and investment advisors have converged with respect to providing investment advice to individual investors. The services of brokers and investment advisors have become almost indistinguishable to investors, but the Securities and Exchange Commission's regulatory scheme does not reflect this fact. Currently there is a debate over the "Merrill Lynch Rule," which provides a regulatory exemption for stockbrokers to offer fee-based financial advice without providing the same investor protections as the Investment Advisors Act of 1940. As a result, stockbrokers and investment advisors are both offering fee-based financial advisory services, but are subject to different regulations and therefore provide unequal levels of investor protection.
OBJECTIVES OF THE STUDY
The TD Waterhouse 2004 Investor Perception Study examined investor awareness, expectation, concern and impact around the unequal levels of investor protection provided by stockbrokers and investment advisors offering fee-based financial advice. In particular, the study sought to gauge:
- The relevance of unequal levels of investor protection around fee-based financial advice
- Whether investors understand that different levels of investor protection exist for the same services
- Whether investors are concerned about different levels of investor protection for the same services
- If increased awareness of unequal protections would impact an investor's choice of a financial professional
KEY FINDINGS INCLUDE:
AWARENESS:
There is confusion and low awareness regarding the unequal levels of investor protection provided by investment advisors and stockbrokers:
- 58% of investors incorrectly believe that both stockbrokers and investment advisors have a fiduciary responsibility to act in an investor's best interest in all aspects of the financial relationship
-- Only 25% of investors indicated they were aware that investment advisors already have a fiduciary responsibility to act in an investor's best interest in all aspects of the financial relationship
-- 44% of investors were not aware that stockbrokers do not have a fiduciary responsibility to act in the investor's best interest in all aspects of the financial relationship
- 63% of investors incorrectly believe that both stockbrokers and investment advisors are required to disclose all conflicts of interest prior to providing financial advice
-- Only 17% of investors indicated they were aware that investment advisors are already required to disclose all conflicts of interest prior to providing financial advice
-- 51% are not very aware or not aware at all that stockbrokers are not required to disclose all conflicts of interest prior to providing financial advice
EXPECTATION:
Although awareness is low, investors have high expectations regarding protections offered by providers of fee-based financial advice.
- 69% expect all financial professionals that offer fee-based financial advice to provide the same level of investor protection
- 83% expect all financial professionals that offer fee-based financial advice to act in the investor's best interests in all aspects of the financial relationship
- 84% expect all financial professionals that offer fee-based financial advice to have the same conflict of interest disclosure requirements
- 78% expect a stockbroker to disclose all conflicts of interest to an investor in a financial relationship either before providing financial advice or before and regularly thereafter
- 84% expect both stockbrokers and investment advisors providing fee-based financial advice to be subject to the same industry regulation
CONCERN:
Furthermore, investors are very concerned when they learn that there are unequal levels of protection provided by stockbrokers and investment advisors.
- 81% were either very concerned or somewhat concerned that both stockbrokers and investment advisors provide fee-based financial advice yet offer unequal levels of investor protection
- 83% were either very concerned or somewhat concerned that all financial professionals offering fee-based financial advice are not subject to the same industry regulation
- 82% were either very concerned or somewhat concerned that stockbrokers are not required to act in the investor's best interest in all aspects of the financial relationship
- 82% were either very concerned or somewhat concerned that stockbrokers are not required to disclose all conflicts of interest prior to providing financial advice
IMPACT:
If American investors had a higher degree of awareness of the unequal levels of protection provided by stockbrokers vs. investment advisors, it would impact their choice of financial professional.
- 86% indicated it would impact their choice of financial professional if they understood the different levels of investor protection from stockbrokers and investment advisors offering the same services
- 81% were either very likely or somewhat likely to seek services from an investment advisor if they knew investment advisors were required to act in the investor's best interest in all aspects of the financial relationship
- 81% were either very likely or somewhat likely to seek financial advice from an investment advisor if they knew investment advisors were required to disclose all conflicts of interest prior to providing financial advice
- 88% indicated they would not seek financial advice from a stockbroker if they knew stockbrokers were not required to act in the investor's best interest in all aspects of the financial relationship
- 87% indicated they would not seek financial advice from a stockbroker if they knew stockbrokers were not required to disclose all conflicts of interest prior to providing financial advice
In addition, as investors became more informed of the unequal protections throughout the course of the survey their levels of expectation increased significantly. These findings represent the last sequence of questions in the survey.
- 92% expected that all financial professionals who offer fee-based financial advice should provide the same levels of investor protection
- 94% expected that all financial professionals who offer fee-based financial advice should be required to adhere to the same industry regulation
- 95% expected that financial professionals who offer fee-based financial advice should have a fiduciary responsibility to act in the investor's best interest in all aspects of the financial relationship
- 95% expected that all financial professionals who offer fee-based financial advice should be required to disclose all conflicts of interest prior to providing financial advice
In the end, a significant majority of the American investing public expressed support for Congress to enact legislation that creates a clear, uniform standard of investor protection for all stockbrokers and investment advisors who provide fee-based financial advice.
- 90% of the American investing public expressed support for Congress to enact legislation that creates a clear uniform standard of investor protection for all stockbrokers and investment advisors who provide financial advice to investors
- 87% indicated that Congress should enact legislation that requires stockbrokers to have a fiduciary obligation to act in the investor's best interest in all aspects of the financial relationship
- 90% indicated that Congress should enact legislation that requires stockbrokers to disclose all conflicts of interest prior to providing financial advice
- 88% believe legislation that creates a uniform standard of investor protection applicable for both stockbrokers and investment advisors would boost investor confidence
CONCLUSION
American investors have a low level of awareness about the regulations governing stockbrokers and investment advisors. The survey results indicate investors are unaware of, and confused about the unequal protections offered by those who provide fee-based financial advice. However, investors have very high expectations regarding the protections that should be provided by stockbrokers and investment advisors offering fee-based financial advice. Consequently, investors expressed a very high level of concern regarding the disparities in protection based on existing regulations. The survey clearly indicated that if investors had a higher degree of awareness, this knowledge would impact their choice of a financial professional.
METHODOLOGY
TD Waterhouse USA commissioned research firm Penn, Schoen & Berland Associates, Inc. to conduct interviews with 1,000 American investors who own stocks, bonds, or mutual funds outside of a company-sponsored plan. The survey has a margin of error of + or - 3%. Interviews were conducted online from October 18 - 22, 2004.
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