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Canadians trusting of financial advisers and clueless on costs
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Moneyville
The biggest investment decision for the vast majority of Canadians isn’t about what to buy, sell or hold. It’s choosing an adviser.
Yet investors commonly put little effort into finding the right fit. Most often, the adviser is someone who has been assigned to them by their bank, brokerage or other financial-services firm.
Nor are most investors aware of the range of choices the adviser can provide, or what they’ll charge. Canadians tend to be very trusting of their advisers, and clueless on costs.
These are some of the conclusions drawn from the results of two recent national surveys, each with 2,000 respondents. The research was commissioned by the Investor Education Fund, an independent non-profit organization which is financially supported by the Ontario Securities Commission.
The OSC was involved in setting objectives for the study, which is aimed at understanding what investors expect from their advisers, and what they need to know.
Roughly five out of six investors are clients of financial advisers who make recommendations, according to the surveys, which were conducted in December and January. Two-thirds of investors rely on their advisers to decide what’s best for them, says the report authored by the Brondesbury Group, a Toronto firm.
Advisors were much more relied on than friends or family, the media, other independent sources, regulatory documents, or corporate sources such as fund-company printed materials or websites. For purchases of stocks and mutual funds, “the adviser was most likely to be the first source used and the last source used by more than a six-to-one ratio over any other source.”
Younger and better educated investors were more likely to seek out other information sources, particularly online. At the other end of the age spectrum, many investors 60 years and older relied exclusively on their advisers.
Investors lack knowledge about the different kinds of registrations for advisers, and how that affects the range of investments they can offer. (For example, advisers who are employed by brokerage firms can sell stocks and exchange-traded funds, while mutual fund dealers can’t.)
In communications with advisers, the kind of investment that’s most talked about is mutual funds. This held true for all age groups, ranging from 20-somethings to the elderly.
There was a lack of awareness of the relationship between fund fees and adviser compensation. The researchers concluded that investors generally “have little or no idea about how advisers can get paid.”
Awareness of trailer commissions was especially low. Also known as trailers, these ongoing payments are made by a fund company to the adviser for as long as the investor holds the fund.
Before taking part in the survey, only one-third of respondents were aware that trailers existed. (Trailers, which are paid by most fund companies, are disclosed in the fees and expenses section of the prospectus, and in the much shorter disclosure document called Fund Facts.)
Once they were told about trailers, only one quarter of respondents said they believed that they are disclosed. The older the respondent, the less likely they were to believe that trailers are disclosed.
The researchers also asked investors about conflicts of interest. Roughly half of investors said they had no opinion as to whether there was a conflict for advisers who receive trailer commissions from the companies whose funds they sell.
Of the respondents who did express a view, three-quarters “believed that their adviser would look out for their best interest regardless of how the adviser was paid.”
The 48-page study has been posted at www.getsmarteraboutmoney.ca. It’s well worth reading, especially if you’re looking to hire an adviser or evaluating your current relationship.
Excellent advisers will strive to deserve your trust. At the other extreme, rogue advisers will take advantage. Choose with care.
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