Investors who don’t care about and don’t understand investing delegate the activity to advisors, with little understanding of the fees they pay or their advisor’s qualifications, according to research from FAIR Canada.
The Toronto-based investor advocacy group published the results of focus groups carried out by The Strategic Counsel, a market research firm. The research sought to understand the attitudes of ordinary retail investors.
Participating investors weren’t particularly interested in the chore of managing their finances.
“The task of investing is not an activity that engenders a lot interest and engagement despite its importance to their household finances. [Participants] prefer to allocate more of their personal time to other areas — working, children, recreational activities, among others,” the report said.
Additionally, the investors encountered high barriers to learning about investing for themselves.
“They perceive the terminology and language of the industry as hard to understand,” the report noted, saying investors also found investment documents difficult to review.
Given these factors, most participating investors were content to outsource the activity to advisors or frontline reps at their banks, the report said.
“Due to their low overall interest in investing, few expressed a desire to spend additional time and effort acquiring knowledge in this area. Many believed that it was preferable to rely on the knowledge and advice of industry professionals rather than learning about investing on their own.”
As a result, investors placed a great deal of trust in both their advisor and their firm. This trust was grounded in several factors, including longstanding relationships with advisors, positive historical returns and the firm’s reputation.
“Much of the trust was not necessarily earned by the advisors but rather given to them by their clients,” the report found. “Many investors seemed to have ‘blind trust’ in their advisor.”
For example, while participants said they viewed their advisors’ qualifications as important, most didn’t know or understand those qualifications.
And “while they accepted their advisor should get paid, participants did not understand how their advisor was compensated” or how those fees impacted their returns over the long run, the report noted.
Investors defined fairness in the context of investing as recommending investments in the interests of the client; providing clarity around advisor compensation; communicating using terminology that’s easy to understand; and willingness to help and guide small investors.
“In a time of rising interest rates and affordability crisis, Canadians are often placing their future in the hands of investment advisors without asking the right questions,” said Jean-Paul Bureaud, executive director of FAIR Canada, in a release. “Investors told us they not only struggle to understand the products they were recommended, but many also didn’t understand the type of advisor they were dealing with.”
Bureaud suggested the findings represented an investor protection concern.
“Most investors in the advisor channels found investing difficult to comprehend and learn. So, it is no surprise to observe a tendency to blindly trust whatever their advisors told them. This exposes them to potential risks and makes them more vulnerable to bad advice,” he said. “[W]e need to do a better job of educating and preparing Canadians to invest.”
The focus groups were conducted online with 49 participants who represented a mix of DIY and advised investors with at least $10,000 invested.
Last week, a study from the CFA Institute found that Gen Z investors tended to take advice from finfluencers because cost was a barrier to accessing a professional financial advisor, but that only 20% of finfluencer content containing investment recommendations had disclosures of any kind.