Data & Research May 25, 2017

Financial Industry Scandals Causing Consumers to Lose Confidence

Of the more than half of Americans who don’t receive professional financial advice, 45% say it’s due to a lack of confidence.
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In light of recent financial services scandals stealing headlines, a study by digital wealth adviser Personal Capital finds that most Americans lack confidence in financial advisers. According to the survey, 70% of respondents said that recent events in the industry have made them question the trustworthiness of financial services professionals. A third believe these practitioners are likely to take advantage of them. Of the 54% of Americans who don’t work with financial advisers, 45% say the indecision is due to a lack of trust.

This report comes ahead of the Department of Labor’s (DOL)’s recent announcement that its Fiduciary Rule, which will raise the standards for advisers working with employer-sponsored retirement plans and even individual retirement accounts (IRAs), will begin to undergo implementation on June 9.

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“Too many traditional players in this industry are prioritizing their products, commissions and fees before the client’s best interests, and that is putting consumers’ hard-earned savings and retirement security at risk,” said Personal Capital CEO Jay Shah. “Typically, this is not the customer’s fault, as many advisory firms bury fees in fine print and jargon that is difficult to understand. We encourage all firms to meet a higher standard when it comes to offering objective, personalized financial advice in a more transparent manner, so that we can empower Americans to better manage their financial lives.”

However, the study also found several people are still in the dark about what a financial adviser actually does and how their money is invested. Almost half (46%) mistakenly believe that all financial advisers are required by law to act in their clients’ best interests. Even more troublesome, 32% believe higher fees spell higher returns. However, a recent study by independent research firm Morningstar indicated that low-cost mutual funds generally outperformed their more expensive peers.

Furthermore, twenty-one percent of respondents with at least one investment account, who know they pay fees, don’t actually know how much they are charged. Twenty-eight percent of investors say they don’t pay attention to their investments’ fees – a figure that jumps to 47% for those ages 18 to 34.

These findings stress a need among the industry to educate investors about the basics of investing and professional financial advice in simple language. Still,the study shows several advisers are also raising confidence among their clients. The survey found 89% of Americans who worked with financial advisers were confident their advisers would act in their best interests.

Personal Capital commissioned this survey conducted online by Harris Poll in March 2017 among more than 2,000 U.S. adults. The 2017 Financial Trust Report can be accessed at PersonalCapital.com. 

Client Service May 24, 2017

Top-Performing Advisers Look Past Averages

Stress testing the impact of individual behavior and circumstance, along with market returns, can be especially useful. 
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For the second year in a row, J.P. Morgan Asset Management invited PLANADVISER to sit in on the firm’s defined contribution (DC) adviser summit, an event held each year in New York as a frank peer-to-peer discussion among the firm’s top-performing advisers.

One clear theme that emerged is that advisers are looking for ways to move beyond just thinking in terms of basic averages and unsophisticated data sets.

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As Anne Lester, portfolio manager and head of retirement solutions for J.P. Morgan Asset Management, asked, “We all talk about averages, but how many people actually meet the definition, and do we understand what a given average is actually telling us?” For an example she observed that the average life expectancy for a 65-year-old American woman is 86. “How many American women die at age 86? Only 8.5%.”

Lester explained that employers, financial advisers and individual investors often will of course have to rely on averages and medians to start a retirement planning conversation—retirement age, life expectancy, investment returns. Yet averages can be hugely distorting because, in fact, no one is average.

“The strongest retirement plan, whether it is for a single individual or a 401(k) plan for a large group of employees, will be designed for the edges as well as the middle,” Lester noted, “and for every point along a wide continuum of life choices and experiences.”

Advisers at the DC summit seemed to broadly agree they have an opportunity to play an even more important role in helping their clients understand the consequences of their choices and calibrate their tolerance for the spectrum of risks faced in retirement.

Stress testing the impact of individual behavior and circumstance, along with market returns, can be especially useful, Lester stressed.

“In planning for retirement, individuals should assess their particular circumstances and concerns and not assume that they can safely rely on the averages,” she urged. “Do they have a family history of longevity? Did they start saving for their retirement in their 20s, 30s or only in their 40s? Are they healthy? Are their savings in cash or do they diversify their investments?”

It is only after an individual understands what variables are under their control and how they might influence them that true retirement planning can commence.

NEXT: Thinking deeply about data

Defining and determining averages is a science unto itself, but there are some basic principles that all advisers should be keeping in mind as they serve DC retirement plans, Lester argued. At the very least, thought should be given to the fact that a wide gap will often show up when looking at stats like DC plan account balance mean average versus the median in a given plan population.

Broadly speaking, she agreed the median is usually a more informative figure when considering a given feature or characteristic of a defined contribution plan. But the simple mean average is often much easier to determine than the median, meaning it is used more often than not.

To underscore the point, Lester cited data provided by the Employee Benefits Research Institute (EBRI), showing that across all U.S. DC plans the average account balance is something like $76,000—but it is just $18,000 at the median for those participants younger than 40. Participants older than 40 show a median account balance of $25,000.

The J.P. Morgan expert went on to explain that “even two folks with a similar financial picture today can end up having entirely different experiences” down the road—yet another reason to think more individualistically about advising retirement plans. Crunching the numbers for a theoretical average individual, the analysis suggests a combined 16% savings rate between employer and employee contributions should be sufficient to establish lifetime retirement readiness by age 65. However, if the same individual ends up requiring a two-year stay in a nursing home, he would need to save 21% a year to have sufficient funds to last until 90. 

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