Suitability versus Fiduciary Standards Unclear to Investors

A majority of investors do not understand the difference between suitability versus fiduciary standards, according to the J.D. Power and Associates 2011 U.S. Full Service Investor Satisfaction Study. 

The study found that 85% of investors either have not heard of or do not understand the difference between a suitability standard (where advisers are required to make investments they deem suitable for their clients) and a fiduciary standard (where advisers are required to act in the best interests of their clients and disclose all conflicts of interest). Among those full service investors who are currently in a fiduciary relationship, 57% state that this increases their comfort level with their adviser, while 42% state that it decreases their comfort level.

“While higher levels of satisfaction are generally associated with clients in fiduciary relationships, legislating all advisers to this standard carries an unintended consequence of additional compliance oversight, which could translate into significantly higher costs—likely to ultimately be passed back to investors,” said David Lo, director of investment services at J.D. Power and Associates.

The study set out to measure overall investor satisfaction with full service investment firms in seven factors (in order of importance): investment adviser, investment performance, account information, account offerings, commissions and fees, website, and problem resolution.

RBC Wealth Management ranks highest in investor satisfaction with a score of 814 on a 1,000-point scale and performs particularly well in investment adviser and account information. Charles Schwab & Co. follows with a score of 805, performing particularly well in account offerings and website. Fidelity Investments ranks third with a score of 796.

The study also found that usage of online communication channels has increased compared with previous years:

  • Fifty-nine percent of full service investors have visited their firm's Web site in the past 12 months, up from 52% in 2009.
  • Fifty-one percent of full service investors have exchanged an email with their adviser in 2011, compared with 19% in 2008.
  • Among investors who visit their firm's Web site, those older than 64 years average more than 35 visits to their firm's site per year. In comparison, investors younger than 45 years average 12 visits per year and investors between the ages of 45 and 64 average 23 visits per year.
  • Reviewing documents posted by an adviser and reviewing tax information are among the most common tasks performed by investors visiting their firm's site.

"Proactive outreach from advisers goes a long way in developing the client-adviser relationship, and expectations as far as frequency of contact have increased coming out of the recession," said Lo.

The 2011 U.S. Full Service Investor Satisfaction Study is based on responses from more than 4,200 investors who make some or all of their investment decisions with an investment adviser. The study was fielded in March 2011. To see how other companies were ranked according the criteria, click here.