Many Investors Are Confused About Financial Advice: Personal Capital

Many Americans have misconceptions about financial advice, in particular about whether their best interest is being served, according to research released Wednesday by the digital advisor Personal Capital.

Forty-eight percent of investors in Personal Capital's 2019 financial trust report believed that all financial advisors were required by law to always act in their clients' best interest, and 65% of those who worked with an advisor believed that all financial advisors recommend only what is in a client's best interest, up from 46% who said this in 2017.

Neither notion is correct, Personal Capital said.

The definition of "best interest" — the focus of continuing debate among regulators — may be adding to investors' increased confusion, it said.

The Financial Services Institute was scheduled to testify Wednesday before committees in the Senate and the House of the Maryland legislature regarding that state's proposed fiduciary rule.

"While we hope all financial services professionals and firms are working with Americans' best interests in mind regardless of fiduciary designations, this simply isn't the case," Jay Shah, Personal Capital's chief executive, said in a statement.

"When it comes to wealth management, anything less than advice that meets the fiduciary standard simply isn't acceptable. Investors deserve more."

The study was based on an online Caravan survey conducted by Engine in December among 1,004 men and 1,003 women 18 and older.

The survey found that although 30% of respondents thought a financial advisor was likely to take advantage of a consumer, 97% trusted that their own financial advisor would act in their best interests.

At the same time, 18% of investors were unable to say whether their advisor was a broker-dealer or a fiduciary. Personal Capital said the 26% who indicated their advisors were broker-dealers should reconsider whether they are receiving unbiased financial advice.

The survey found that 28% of investors trusted an RIA with their money, 21% a big bank or brokerage firm, 14% a local advisory company and 8% an online platform or mobile application. One in three respondents said they would not trust any of these options.

The survey further showed that investors are more loyal to their advisors than to their financial institutions. Seventy-one percent of survey participants said they would follow their financial advisor if he or she moved to another institution after the advisor's firm was involved in a scandal.

Millennial respondents proved to be the most loyal, with 80% indicating their willingness to follow their advisors to a new institution, compared with 70% of Gen Xers and 66% of baby boomers.

According to the survey, only 44% of investors knew the amount of fees they paid on their investment accounts, up from 39% in 2017.

Moreover, 20% reported not knowing how their financial advisor was compensated. Hidden fees can add up to more than $400,000 in an investor's lifetime, Personal Capital found in its 2017 study examining advisory fees and fund fees at brand-name firms.

Trust in Fintech

Seventy-eight percent of investors in the survey considered the widespread adoption of technology within financial services as a positive development, claiming these benefits of fintech:

Convenience: 74%
Ease of use: 69%
Its ability to help them better understand their finances: 44%

All generations in the study agreed that technology in financial services was overwhelmingly positive. However, apprehension increased with age, from 87% of millennials viewing fintech positively, to 79% of Gen Xers and to 72% of boomers.

For the remaining 22% of respondents who saw fintech's widespread use as negative, 69% cited cybersecurity concerns, with 46% preferring traditional financial interactions.

Personal Capital noted that the concern around cybersecurity may be more hypothetical than reality-based, as 92% of investors said they believed their personal and financial information was safe with their financial institution.

"Technology can help investors better understand their full financial picture, from shedding light on hidden fees to mapping cash flows from today into retirement," Shah said.

"Yet technology, on its own, isn't enough — it can't replace the value of a personal relationship between an investor and her advisor. The best way to give comprehensive, personalized advice is to bring technology and people together."