Views on improving the integrity of global capital markets
20 June 2011

Investor Indifference to Fiduciary Care?

Posted In: Fiduciary Duty

Does it matter to investors whether their financial advisers follow a fiduciary standard? The answer appears to be “No,” according to the J.D. Power 2011 U.S. Full Service Investor Satisfaction Study.SM The study finds that 85 percent of full service investors either have not heard of, or do not understand, the difference between a suitability standard and a fiduciary standard. It seems the debate surrounding efforts to impose a single standard of care for investment professional is lost on investors.
 
Does this mean that clients don’t care about the level of care and commitment they receive from their financial advisers? On the contrary, investors’ level of satisfaction with their advisers is contingent on the very hallmarks of a strong commitment to ethical practice. The “key performance indicator” for client satisfaction is transparency, according to J.D. Power and Associates. Indeed, investors want more and frequent communication with their advisers. This is borne out by the increased amount of communication (especially online communication) engaged in by clients over the past several years as shown by the survey. Clients want their advisers to explain the reasons for performance, explain their fee structure, provide information on new products and services, discuss risk tolerances, and develop a strategic or financial plan. These factors should look pretty familiar to investment professionals who follow best ethical practices. Investment professionals will go a long way toward satisfying their clients by committing and complying with a code of ethics that mandates these actions.

What the J.D. Power survey shows is that deeds speak louder than words. Ultimately, it is not words like “suitability,” “fiduciary,” “duty of care” tossed around by regulators that has the attention of investors, but the substance of their advisers’ actions that are of primary concern. And rightly so. The survey shows that expectation levels of clients continue to increase. No matter what the standard of care, or which regulator is charged with enforcing the standard, investors want advisers who act in their best interests and communicate with them truthfully on a regular basis about the fundamentals of their financial assets and investments. 

The ability to affect behavior by mandating a particular standard of care through laws, rules, and regulatory action is limited. Ultimately there has to be an industry-wide commitment to fundamental ethical principles of placing client interests first. Truly integrating a culture of integrity will emerge as a key distinguishing factor for financial services firms that want to attract and keep business. Until the investment community as a whole commits to the highest standard of ethical conduct, investor levels of satisfaction and trust will remain low. 

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

1 thought on “Investor Indifference to Fiduciary Care?”

  1. Jim Dowd says:

    “The ability to affect behavior by mandating a particular standard of care through laws, rules, and regulatory action is limited.” I disagree with the foregoing statement. If a particular type of behavior is prohibited by law or rule, it will stop. The fact that “85 percent of full service investors either have not heard of, or do not understand, the difference between a suitability standard and a fiduciary standard” underscores the need for strong leadership from our profession. Carefully worded push polls designed by the brokerage industry (to deflect attention from the issue of whether professional financial advisors should be required to put clients’ interests before their own) should fool no one. One way for our community to commit to the “highest standard of ethical conduct” is to support clear and simple regulations that prohibit and deter unethical or questionable behavior by those who lack an ethical compass or a long-term perspective.

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