How Advisers Can Build Trust Among Investors

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.

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.