Here’s a conundrum for advisors meeting fiduciary standards: roughly two-thirds of investors say they really want good, conflict-free fiduciary advice, yet few are willing to pay extra for it.
That begs a serious question for the financial services sector – how can they convince investors it’s worth more money for fiduciary investment advice?
The two-thirds figure comes from a new Spectrem Investor Pulse report, a monthly survey of 1,000 investors on key money management issues. In it, Spectrem reports that many investors still can’t define the term “fiduciary.” Even among respondents who know the term, the majority won’t pay extra for fiduciary advice.
Crunching the numbers, Spectrem reports that, on a scale of one to 100, respondents assign a score of 39 on the topic of “paying more for an advisor who serves as a fiduciary.”
That figure goes higher when individual incomes are included. For example, survey respondents with more than $5 million in financial assets rate a score of 49 on the issue.
Even so, those numbers pale compared to the 65 percent of respondents who believe that a fiduciary role is “necessary” for financial advisors working with clients on retirement savings issues.
'Sometimes You Have to Pay'
For some investors, learning where to land on the fiduciary advice issue was a hard lesson learned.
“After past failed investments, where I got poor quality advice and incomplete information, I’m now learning that, in order to make the best fiduciary decisions for my future, sometimes you have to pay for the right financial advice,” said Adrienne Vyfhuis, managing director at The 5 House Group, a life-skills training organization in Brentwood, Md.
“The average person would do much better financially to pay for the premium services being offered at their comfort and financial level,” she added.
On the financial advisor front, professional money managers say that investors have been fed a bill of goods for decades stating that it’s “okay” to go cheap on financial advice.
“Individuals investors have fallen for the ridiculous ‘You don’t pay me anything’ line from insincere brokers for decades,” said Michael Alexenko, a financial advisor and president of Royal Asset Managers in St. Charles, Ill. “If an investor doesn’t ask the obvious question, ‘If I don’t pay you anything, then how do you get paid?’ then he has no one to blame but himself for paying what will likely amount to truly paying more.”
The way Alexenko sees it, transparency and the fiduciary standard are “synonymous,” while obfuscation and disguise are the favorite practices by those who enjoy playing on an unleveled field.
“The false conclusion that fiduciary advice costs more is perpetrated by a gang of brokers who benefit from claiming that the other advisor costs too much, while at the same time keeping their own compensation as opaque as possible,” he said.
As long as they can hide their costs that are buried in voluminous fund reports they gain the advantage of preying on an uninformed public, he added.
“That’s why the fiduciary rule that’s on the verge of implementation would have been vastly improved if it just required full disclosure on costs and allow the buyer to decide where the value really is,” Alexenko said.
As always, there are caveats on the issue of financial advisors, clients and fees. It’s not uncommon for many independent registered investment advisors to offer some legitimately free advice to small investors who are capable of opening a brokerage account and processing a mutual fund purchase.
“For people with $25,000 to invest, my pro bono assistance has saved many of them $1,250 in worthless upfront mutual load costs and unnecessary high annual expense ratios,” Alexenko said. “Even the robot advisor can’t beat that deal.”
To make the case that investors really do need strong fiduciary advisory services, money managers have to sell themselves, as transparently as possible.
“The first major issue is with communication and the advisor not clearly defining his role and the value he/she is bringing to the client. The second major issue is with the portion of the financial services industry that is trying to equate fees with advice,” explained Tom Alessi, an investment advisor with Westwood Wealth Advisors, in Newton, Mass. “The value of a true fiduciary investment advisor is worth 3 percent to 3.5 percent to a client.”
Moreover, advisors need to spell out the ramifications of going without a strong investment advocate in your corner.
Without expert advice, investors will not have the foresight to make the correct and important decisions to deal with unexpected life challenges, said Lou Cannataro, senior partner at Cannataro Park Avenue Financial in New York City.
“Investors need to know a financial plan is key to supporting one's career, business and family,” he said. “Having a financial advisor keeps people on financial track and accountable for their planning to avoiding huge mistakes.”
The real value in hiring a wealth advisor is to protect your assets, continue to grow your wealth and have a long-term a personal connection with someone that knows you well enough to avoid any future negative ramifications of any decisions, Cannataro added.
“The financial advisor community will win over the critics who do not see this intrinsic value when they realize how invaluable and profitable having a wealth advisor is, versus not having one,” he said.
Wise words indeed – if, that is, a U.S. adult population that so often dismisses paying more for good fiduciary advice is willing to listen, and more importantly, act on that advice.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]
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