In Practice May 22, 2015

Self-Directed Investors Still Value Support

Even skilled self-directed investors want to receive support when it comes to planning and achieving financial goals, according to the J.D. Power 2015 Self-Directed Investor Satisfaction Study.
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J.D. Power’s financial services practice released the 14th edition of its self-directed investor survey, finding overall customer satisfaction in this segment of the investing marketplace in 2015 averages 763 on a 1,000-point scale—holding steady from the previous year.

The study measures self-directed investors’ satisfaction with their investment firms based on performance in six factors (in order of importance): interaction; account information; trading charges and fees; account offerings; information resources; and problem resolution. Looking across these metrics, J.D. Power says it’s clear self-directed investors “want and expect more from their firm than just low-cost trades, fast and reliable trade execution and access to research.”

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“While they may not be looking for a full time one-on-one adviser relationship, they are increasingly looking for a guidance-based relationship to help them establish and track performance against their personal financial goals,” the study finds. “Investors with guidance-based relationships are much more likely to recommend their firm to friends and family as well as increase their investment levels with the firm.”

Successful guidance-based relationships are based on three pillars, according to J.D. Power. These are effective communications, relevant educational resources, and a robust and intuitive suite of digital tools that help investors with financial planning and portfolio management. The study suggests firms that can effectively cultivate these elements can satisfy clients and potentially retain them over the long term, which is especially important with respect to younger clients. 

With respect to investment style, the study shows 66% of self-directed investors describe themselves as “true do-it-yourself investors” seeking no adviser input. Another 21% consider themselves to be “validators,” preferring to have a professional act as a sounding board for their ideas. The remaining 13% consider themselves “collaborators,” the study finds. This group largely makes decisions collectively with help from some sort of adviser. 

Importantly, J.D. Power finds the number of validators and collaborators is even higher among Millennials (38%) and women investors (38%), two critical and fast-growing segments of the investor market.

Mike Foy, director of the wealth management practice at J.D. Power, says self-directed investors “may not be looking to delegate managing their money to an adviser, but they do value access to guidance when they are ready for it.” He says the research shows a lot of diversity in the kind of guidance clients want—from online financial planning tools they can use on their phone or tablet, to webinars about saving for their children’s education, to one-one-one meetings with a professional adviser.  

“Firms need to make sure that their clients understand what’s available to them and how the overall value proposition relates to what they pay,” Foy concludes. “In most cases, clients are getting a lot more value from their firm than just the ability to trade.”

Other key findings show overall satisfaction is higher among self-directed investors who have a guidance-based relationship (828) than among those who do not (656). And when considering the three pillars of guidance-based relationships, each has a significant impact on satisfaction. Effective communication of products and services, for example, leads to a 58-points jump in satisfaction on average. Offering quality investment educational resources gives a 86-points boost to satisfaction, and providing digital asset-allocation tools brings an even bigger 114-points bump.

Among self-directed investors with a guidance-based relationship, 64% say they “definitely will” recommend the firm, compared with 26% among those who do not have this type of relationship.

Even more important—only 40% of investors interviewed for the J.D. Power study indicate they completely understand the fees they pay, so advisers and other financial services providers should feel some responsibility to improve that. Investors who indicate they received an explanation of fees from their firm are over three-times more likely to indicate they completely understand the fees, compared with those who did not receive such an explanation (50% vs. 16%).

The 2015 U.S. Self-Directed Investor Satisfaction Study is based on responses from more than 3,700 investors who make all of their investment decisions without the counsel of a personal investment adviser. The study was fielded in January and February 2015.

Additional findings and results from the study, including firm-by-firm rankings, are here. 

Compliance May 22, 2015

Increased Litigation Not Necessarily the Result of Tibble

Some have taken the Supreme Court’s decision in Tibble vs. Edison as paving the way for increased litigation based on the “duty to monitor,” but this is not necessarily the case.
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Like other industry practitioners closely involved in Employee Retirement Income Security Act (ERISA) compliance, Russell Hirschhorn has spent much of the last week discussing implications of the U.S. Supreme Court’s decision in the long-running Tibble vs. Edison fee case.

Hirschhorn is a senior counsel in the ERISA Practice Center and the Labor & Employment Law Department of Proskauer, where he focuses on complex ERISA litigation and advises and represents employers, fiduciaries, trustees and plan service providers on benefit and fiduciary issues. Explaining the background of the case, he says the question before the Supreme Court involved the timeliness of claims challenging a fiduciary’s continued offering of an investment fund initially selected outside ERISA’s six-year period of repose.

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In short, the Supreme Court determined such claims should not generally be time barred, because ERISA fiduciaries also have a distinct “duty to monitor” the ongoing prudence of investments offered on a defined contribution plan investment menu. This doesn’t necessarily amount to a victory for the plaintiffs and their claims that Edison International failed in its duty of prudence, Hirschhorn says, because the SCOTUS ruling very purposefully declined to define the real shape and limits of the duty to monitor.

The Court instead remanded those challenging factual determinations to the appellate court for additional consideration, Hirschhorn notes. His opinion on the Tibble decision’s implications seems to match the wider industry consensus that the top federal court took only a modest step to ensure the fiduciary “duty to monitor” retirement plan investments is defined as a distinct duty from the initial requirement to prudently select investments under ERISA. He feels it’s too soon to say exactly how the duty to monitor will be treated in future litigation, but he says a few things are already clear about the limits of such challenges.

“The U.S. Supreme Court ruled that an ERISA plan participant may allege that a plan fiduciary breached the duty of prudence by not properly monitoring the plan’s investment options as long as the alleged breach of the continuing duty occurred within six years of the suit,” he explains. 

In so ruling, Hirschhorn says the Supreme Court vacated an earlier decision from the 9th U.S. Circuit Court of Appeals, which held that, absent a “significant change of in circumstances,” a participant could not pursue such a claim based on the selection of an investment option more than six years prior to the suit. 

The Court reasoned that trust law requires a fiduciary to conduct “a regular review of its investments with the nature and timing of the review contingent on the circumstances,” Hirschhorn continues. This means it “will not be enough to simply plead that defendants failed, within six years of filing suit, to prudently monitor an investment option,” Hirschhorn notes. Rather, as the Supreme Court has articulated in a variety of earlier cases, a plaintiff must be able to plead a plausible claim. 

“That is, plaintiffs will have to plead enough factual matter to nudge their claims across the line from conceivable to plausible,” Hirschhorn says. To that end, the Supreme Court remanded the Tibble case to the 9th Circuit to determine for an evaluation of the “contours of the alleged breach of fiduciary duty” and whether the fiduciaries satisfied their continuing obligation to monitor the investment options during the six years prior to the filing of the lawsuit.”

 

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