CFA Institute Study: Disclosing Fees, Conflicts Vital to Adviser-Client Relationship

What do investors want?

It’s an issue of critical importance — and concern — to CFA Institute, an organization committed to the highest standards of ethics, education, and professional excellence in the investment profession.

And at no time in the history of the investment management industry has this question mattered more. Longstanding business practices are under scrutiny, stoked by acrimonious debates in the United States over the duty owed by the person giving investment advice, and by the availability of low-cost automated financial advice globally. These issues are poised to change the investment industry as we know it. Simply put, understanding the needs of investors is critical to strengthening client satisfaction and loyalty in a rapidly evolving industry.

For these reasons, CFA Institute partnered with global PR firm Edelman on From Trust to Loyalty: A Global Survey of What Investors Want. In it, we investigate trust within the investment community, surveying retail investors and institutional investors around the world to examine how much they trust the financial services industry, and comparing this to the general population surveyed in the annual cross-sector Edelman Trust Barometer.

While investors have a slightly more positive view than the public, our survey shows there is much more room for improvement. When asked if they trust the financial services industry to do what’s right, 61% of retail investors agreed, 57% of institutional investors agreed, and only 51% of the public agreed. Moreover, the number from the public is up 8% from five years ago — an improvement, but hardly impressive in absolute terms.

These findings have practical implications for the investment management profession. The survey also explored what dimensions influence that level of trust by giving respondents actions to rank in importance and satisfaction. The gaps are eye-opening and provide a roadmap for firms who wish to strengthen their value proposition and build loyalty with investors.

Paul Smith, CFA, president and CEO of CFA Institute, has argued that shortcomings like these and a lack of trust are factors that hold the investment industry back. “Building trust requires truly demonstrating your commitment to clients’ well-being, not empty performance promises or tick-the-box compliance exercises,” he has said. “Effectively doing so will help advance the investment management profession at a time when the public questions its worth and relevance.”

Assessing the Gaps Between What Investors Want and What They Get

Both retail and institutional investors share the view that financial professionals are falling short on issues of fees, transparency, and performance. Among retail investors, the most important actions from an investment firm are that it “fully discloses fees and other costs” and “has reliable security measures.” These even surpass protecting their portfolio from losses. Among institutional investors, “acts in an ethical manner” rated as the most important attribute, followed by “fully discloses fees and other costs.”

That’s not to say that performance is unimportant — 53% of retail investors and 60% of institutional investors cited “underperformance” as the biggest factor that would lead them to switch firms. This was followed by “increases in fees,” “data/confidentiality breach,” and “lack of communication/responsiveness.”

Fee Transparency Even More Important Than Returns

The survey reveals that the biggest gaps between investor expectations and what they receive relate to fees and performance. For many investors, understanding fees — how much they are paying and what they are paying for — ranks above returns in their priorities. Seventy-nine percent of retail investors said it was important to them that their investment firm clearly explain all fees before they were charged, and 73% said generating returns similar to or better than other firms was important.

Retail investors say they are prepared to pay fees, even higher fees, if they feel these costs will add value or deepen existing services. In what areas are retail investors willing to pay more?

• Better protection from portfolio losses (38% say they would pay more for this)
• Reliable security measures to protect their data (35%)

Investors also want more context to understand specific portfolio management strategies, reflecting their increasing desire to be engaged. The top client service action retail investors want is that a firm “helps me understand why my portfolio is positioned the way it is.” This is expected by 70% of retail investors, but only 46% say investment firms are adequately delivering on this — a large gap that firms should close.

Disclose Conflicts of Interest

Investors surveyed also want upfront conversations about conflicts of interest, with fees structured to align with their interests. They want to be sure that their managers are acting in their best interest at all times, and it is in the best interest of investment managers to clearly communicate their commitment to conflict management and resolution.

As regulators and industry professionals alike grapple with the conflicts of interest associated with a variety of investment advice business models, investor preferences are clear: They want the best solutions for their unique needs, and not just the lineup of products that the adviser can receive compensation for selling. Retail investors surveyed prefer to have access to the best product for their unique needs (76%), rather than choosing from a constrained set of products, even if choosing from constrained offerings would lower their out-of-pocket expenses for investment management (24%).

Institutional investors had similar priorities and concerns, and in addition, they identified gaps related to the depth of understanding an investment firm has in helping them solve their problems. For these investors, they expect a firm they hire to think beyond a specific mandate and show they truly understand their organization’s priorities, liability structure, and political dynamics.

Rise of Robo-Advising

The study reveals key regional and demographic differences in what investors value from financial professionals, with implications for robo-advisors.

Looking ahead three years, the majority of investors in Canada (81%), the US (73%), and the UK (69%) say they will still value the guidance of an investment professional to help them versus having the latest technology and tools.

However, the majority of retail investors in India (64%) and China (55%) and half of investors in Singapore believe having access to the latest tech platforms and tools will be more important to executing their investment strategies. Younger respondents also strongly preferred technology to human guidance, so this is an important trend for the future.

What does this mean for financial professionals? It’s simple: Investors expect more than just performance. While markets may be uncertain, there are many factors that investment professionals can control in how they conduct their business and work with clients — and these are very valuable. From transparency around fees and investment decisions to aligning their interests with their clients’, investment firms have great potential to build greater trust among investors.

Show your commitment to advancing ethics and trust:

• Adopt the Asset Manager Code of Professional Conduct at your firm and demonstrate a dedication to placing client interests first.
• Share the Statement of Investor Rights with your clients.
• Build credibility and promote transparency by adopting the Global Investment Performance Standards (GIPS^®).
• Limit reputational and regulatory risks, strengthen your company’s culture, and improve client relationships with our Ethical Decision-Making for Investment Professionals online course and interactive webinars.

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