How Advisers Can Build Trust Among Investors

CFA Institute data suggests industry leaders should seek to understand investor trust so they can deliver the most value to their clients.


Among retail and institutional investors, trust in financial services professionals and firms has increased significantly since 2020, according to new CFA Institute data.

In its 2022 CFA Institute Investor Trust Study, “Enhancing Investors’ Trust,” the CFA Institute compares the trust levels enjoyed by major U.S. industries, from financial services to media. The analysis compares the levels of trust voiced by retail investors versus institutional investors. Among institutional respondents, trust levels were greater than 80% for every industry considered. On the other hand, trust levels varied considerably among retail investors polled, with a 44-point trust gap measured between the most- and least-trusted industries.

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Trust in the financial services industry has increased to 60% among retail investors and 86% among institutional investors, the study says. The most trusted segment of the financial services industry among retail investors is consumer banks; 57% trust or completely trust the segment. At the opposite end, fewer than one-third of retail financial services consumers say they trust or completely trust robo-advisers.

Among retail investors, the study shows that gaps remain between what investors believe is important to get from their advisers and what advisers are actually delivering. The two largest gaps relate to expectations around disclosures of conflicts of interest and the communication of fees.

Institutional investors, on the other hand, did not report a meaningful gap between expectations and deliverables, and were broadly satisfied with their investment firms. The survey suggests that part of the reason why gaps among retail investors are closing is the influence institutional investors have over industry practices through their bargaining power.

The study also reviews the attributes that investors look for when hiring a trusted adviser or firm. Retail investors most value advisers who will be “trusted to act in my best interest.” The importance of achieving high returns has increased since 2020, but this factor still ranks in a distant second place when it comes to establishing investor trust. Among institutional investors, the ability to achieve high returns, the commitment to act in the client’s best interest and the demonstration of compliance with industry best practices rank much more evenly as drivers of trust.

The study identifies five main factors contributing to the higher overall trust levels. These are strong market performance, fee compression, technology-enabled transparency, greater access to markets and new personalized products.

For context, S&P 500 and NASDAQ returns averaged over 20% a year for the past two years, and high returns could conceal trust issues that may arise in a market contraction, the study says. Passive investing and zero-commission trading improved the fee environment for retail investors, reducing barriers to entry and enabling access to investment products.

According to the CFA Institute, there has been increased adoption and integration of technology, leading to more information and better transparency, improved investor understanding and greater confidence in markets. Additionally, the study suggests the use of new apps and tools have made it easier to gain access to markets—especially at smaller asset levels and for an increasingly younger investor base, who have higher trust levels. The introduction of new personalized investment products also gives investors a more immediate connection to how their money is being put to work.

When it comes to factors that break trust, the study shows retail investors have consistently ranked the same four items at the top of the list for reasons to leave an adviser. These are underperformance (42% in 2020 vs. 40% in 2022), a lack of communication/responsiveness (34% in 2020 vs. 38% in 2022), the occurrence of a data/confidentiality breach (35% in 2020 vs. 36% in 2022) and the assessment of fees that are too high (38% in 2020 vs. 35% in 2022).

The reasons that institutional investors cite for leaving an investment firm were much more varied, with the top two reasons from 2020—underperformance and high fees—seeing the largest decrease in priority in 2022, the study says. The top two reasons that institutional investors would stop working with an asset manager today are the failure to adopt a standard voluntary code of conduct for the industry (23%, up 9% from 2020) and statements of corporate views on social or political issues that the institutional investor disagrees with (21%, up 5% from 2020).

The study notes that investors have more trust in firms that use technology effectively, as it not only increases transparency, but also enables more customization and can enable better advice and judgement.

Plan Sponsor Interest in Pooled Employer Plans Has Increased

The largest small employers may be the most interested.

 

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More than half of smaller employers say they are interested in learning more about PEPs, according to new data from the LIMRA Secure Retirement Institute.

Deb Dupont, assistant vice president, worksite retirement at the Secure Retirement Institute, says employers that are already offering retirement benefits are showing more interest in PEPs. 

“Ironically, when there’s already a plan in place, we see smaller employers having a higher interest in PEPs than those employers who don’t already have one. But interest in starting a plan is lukewarm at best among non-plan sponsor employers to begin with. The small employers who do have a plan—presumably a standalone—may be drawn to streamlined administration and the lure of lower costs and liability. It remains to be seen whether SECURE 2.0’s attempts at easing the burden for small employers in offering a plan will spike more interest in both standalones and PEPs,” says Dupont referencing pending federal retirement reform legislation.

Overall, interest has increased from Q4 2020, explains Terrance Power, president of pooled plan provider The Platinum 401k, who is not affiliated with the research. 

“[W]e have seen the interest in pooled employer plans from plan sponsors increase significantly,” he says.

Pooled employer plans were created by the 2019 Setting Every Community Up for Retirement Act to allow unrelated employers to convene to participate in a single 401(k) plan sponsored by a registered pooled plan provider. The goal of provisions in the bill was to encourage employers that didn’t provide retirement plans to their employees to offer one.

Plan sponsors and retirement plan advisers with clients offering an existing retirement benefit may have wanted to understand how PEPs worked in practice and how PEPs could benefit the plan sponsor and retirement plan participants before joining, according to Power. 

“These same plan sponsors are reviewing the options available to them to determine which PEP would best suit their company’s plan and participants,” he says.

In 2020, a handful of PEPs were established, Power explained, and the number has increased since. He pegged the number of PEPs established—based on Department of Labor registration site figures—at 233.

“The sweet spot for employers in most pooled employer plans appears to be plan sponsors who are subject to an annual plan audit as part of their Form 5500 filing,” says Power. “There can be a significant cost savings available to the company as well as a dramatic fiduciary liability offload. Our typical adopting employer has around 150 employees and $5 million in current plan assets,” although some larger companies with plan assets approaching $100 million are also showing interest.

PEP-ing the Market

The SRI researchers asked plan sponsors to rate their interest in PEPs. Among the largest small employers—with 50-99 employees—52% are somewhat interested and 38% are very interested in PEPs, the research shows. For employers with 20-49 employees, 52% are somewhat interested and 34% are very interested.

Prior to the SECURE Act, four in 10 employers with fewer than 100 employees offered retirement benefits, the data show.

“While small employers without current retirement plans are interested in exploring PEPs, few expressed interest in adding them,” says SRI’s Dupont. 

Among the smallest employers, with two to nine employees, 44% are somewhat interested and 14% are very interested, while 47% of employers with 10-19 employees are somewhat interested and 33% are very interested.

LIMRA found that the reasons for lack of interest are consistent across employer sizes up to 99 employees. Small employers that have avoided moving to a PEP have expressed concerns about lower levels of support for the companies participating in the PEP (42%) or lower levels of service for employees (39%). Almost 40% cited wanting to retain control of plan design decisions, and 33% of employers are not convinced that joining a PEP would lower plan costs.

The top reasons for small plan sponsors’ interest in PEPs were cost (52%), reduced administrative responsibility (35%) and reduced plan sponsor legal liability (32%).

“Lower cost is the most compelling reason employers would choose a PEP, but other reasons may combine to create a powerful value proposition for this new construct,” says Dupont. “The attraction of a PEP is similar, whether employers currently do or do not have a DC plan in place. For both, cost is most compelling, but reducing administrative responsibilities also has a stronger appeal for employers that currently manage administrative responsibilities of an existing plan.”

While joining a PEP does allow shared fiduciary responsibility, joining a PEP does not completely absolve plan sponsors of the fiduciary duty to retirement plan participants. “One important thing to consider is how much fiduciary responsibility does the specific PEP that they’re looking at allow them to offload,” explains Catherine Reilly, director of retirement solutions at Smart, a global retirement technology business. 

One reason small business plan sponsors are pondering PEPs is because offering a retirement plan can be a recruitment and retention tool, especially as the labor market has changed since the start of the pandemic. Due to lower unemployment and increased job growth, 67% of small business owners are currently experiencing a staffing shortage, according to a March 2022 survey from the National Federation of Independent Businesses. And according to Lincoln Financial Group’s Small Business Owner Survey, 80% of small business owners view employee benefits as a top priority because of the pandemic, 93% have reevaluated their strategy and plan to make changes due to COVID-19 and 28% of owners have bolstered benefits—including retirement plans.

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