Investors are not only highly satisfied with their financial advisors' performance and the fees they charge, but place a great deal of trust in their advisors, according to a recent B.C. Securities Commission (BCSC) survey that focused on the investor profile and the impact of the second phase of the customer relationship management (CRM2) rules on investor knowledge, attitudes and behaviour. This means that regulators must consider any future course of action carefully and take every precaution to avoid unintended consequences that could eliminate the advisor option, particularly for smaller, less confident investors.
The comprehensive survey, entitled Investor Readiness for Better Investing, covered a wide cross-section of investors in three separate phases: before they received their first CRM2 annual reports, and at both the three- and six-month intervals after they received their CRM2 annual reports. The results reveal that trust in advisors was high before and after investors received these reports. In addition, the high level of satisfaction regarding value for fees paid even before the CRM2 annual reports were first published suggests that many advisors and their dealers had made fees, charges and performance understandable and transparent to their clients.
Notably, satisfaction increased among less confident investors after the CRM2 annual reports came out. However, satisfaction declined marginally for more confident investors, perhaps because of confusion over the new standardized format in these reports — in particular, the mandated money-weighted rate of return vs more conventional time-weighted rate of return. This high level of satisfaction among clients and trust in their advisors likely explain why 70% of investors surveyed described themselves as confident, even though half felt "overwhelmed" when making investment decisions.
Trust in advisors has been consistently high throughout the survey period, among both confident and less confident investors alike. This is largely because advisors and their firms have raised the standard of professionalism in the investment industry over the past five years through higher proficiency requirements; better business practices and tools, such as for financial planning and estate planning; a wide range of investment products; better investor communication through quality of disclosure; digital technology and direct client/advisor contact; and improved transparency.
Furthermore, the BCSC survey indicates that the CRM2 annual reports led to increased client awareness and understanding of fees and performance. This greater awareness has encouraged a significant number of clients –16% of investors surveyed – to contact their advisors proactively. It's also well known from anecdotal evidence that many advisors contacted their clients directly to explain the new CRM2 reporting format and results. Many investors adjusted their portfolios accordingly while a small percentage closed their accounts.
This client reaction suggests the CRM rule framework will, over time, spawn more frequent communication with advisors, as clients become more proactive, and as advisors reach out more often to clients through improved productivity from technological and organizational change. This increased interactive contact will deepen financial relationships and result in better client outcomes.
Given clients' high levels of satisfaction and trust with their advisors, regulators must take the necessary steps to keep the advisor option available to investors in light of the growth of new alternatives such as robo-advisors. This means careful implementation of new rules, constant review of the existing rulebook to alleviate unnecessary regulatory burden, proportionate regulation for specialized small dealers, and streamlining of the firm audit/compliance process. An excessive regulatory burden has the risk of increasing the threshold for new and existing accounts or limiting advice and services for small clients. New rules, such as prohibitions on embedded fees, could interfere with the business of small investment and mutual fund dealers, as small clients are either denied personalized advice or forced into costly fee-based accounts that may not be suitable.
The high satisfaction levels in the survey convey an important message for regulators: Once the targeted reforms are in place — and self-regulatory organizations' rules governing suitability, know your client, know your product, compensation conflicts, client referrals and underwriting are incrementally adjusted — more rules will quickly reach diminishing returns, contributing to the regulatory burden without corresponding benefit.
Regulators should shift their focus from rule-making to compliance and enforcement. In that scenario, the investment industry can concentrate on improving business practices to achieve the best outcome for clients.