`Clueless' U.S. Investors Believe Brokers Have Fiduciary Duty, Survey Says

Three out of four U.S. investors mistakenly think that financial advisers at brokerage firms are required to put clients’ interests first, said a survey by several consumer and financial planning organizations.

Seventy-six percent of investors said financial advisers, a term used by major brokerage firms such as Bank of America Corp.’s Merrill Lynch to describe their salespeople, must uphold a fiduciary duty to their customers, according to the survey, which was released today by groups including the Consumer Federation of America, AARP and North American Securities Administrators Association, all based in Washington.

Brokers currently must meet a standard to offer clients “suitable investments,” whereas most registered investment advisers have a fiduciary obligation to put clients’ best interests first. Seventy-seven percent of investors knew that investment advisers have to abide by a fiduciary standard, the survey said.

“Investors are clueless when it comes to the different standards of care that apply to brokers and investment advisers,” Barbara Roper, director of investor protection for the Consumer Federation of America, said in a statement. “This lack of understanding is not because investors are stupid; it is because, bluntly stated, the policy itself is stupid.”

The Securities and Exchange Commission is due to submit a report to Congress in January on investor protection with the option to create a universal standard as part of the financial- services overhaul bill that became law July 21. The rule would apply to anyone who gives investment advice, including those insurance agents who are dually registered as brokers.

Same Rules Needed

Ninety-seven percent of survey respondents said they support a fiduciary standard for investment professionals providing advice, including requiring disclosure of any fees or commissions they may earn and any conflicts of interest that could potentially influence their advice.

About 90 percent of investors said that a stockbroker and an investment adviser who provide the same kind of investment advisory services should have to follow the same investor protection rules, based on survey findings.

“Older Americans expect financial professionals to put their client’s interest ahead of their own when giving investment advice, but that’s not a requirement for all professionals today,” said Nancy LeaMond, executive vice president of the AARP, which is an advocacy group for people age 50 and older. “The need for the SEC to be a watchdog for investors is even more urgent.”

Vacation Trips

Thirty-four percent of investors said that financial advice is the primary service offered by stockbrokers, even though their main job is actually to buy and sell stocks. Ninety-three percent said brokers should be required to disclose conflicts in advance, such as cash payments or vacation trips they would receive from a mutual-fund company in exchange for selling its product, compared with 86 percent in similar surveys from 2004 and 2007.

Sixty percent of respondents said they thought insurance agents had to uphold a fiduciary duty, which isn’t true. That compares to 96 percent who said the fiduciary requirement should extend to insurance agents giving investment advice, including selling annuities.

The staunchest opposition to a universal fiduciary standard is coming from insurance agents, according to a review of about 2,700 responses following a request by the SEC for comments on the effectiveness of the current standards. Responses from brokers indicate they are conditionally supportive of a universal fiduciary standard, though not one that is based on the principles outlined in the Investment Advisers Act of 1940.

Survey Methodology

The Securities Industry and Financial Markets Association, Wall Street’s main lobbying group, had been opposed to a fiduciary standard for brokers until last year when the group said it supported a single national rule for brokers and investment advisers.

Total assets managed by brokers registered with the Financial Industry Regulatory Authority and registered investment advisers were $10.37 trillion at the end of 2009, according to Boston-based consultant Cerulli Associates.

The survey was conducted in August among a sample of 2,012 people age 18 and over by Omaha, Nebraska-based Infogroup Inc., a provider of market research. Most of the findings were based on responses from the 1,319 people who identified themselves as investors.

The organizations sponsoring the survey include the CFA, AARP, NASAA, Certified Financial Planner Board of Standards Inc., Investment Adviser Association, Financial Planning Association and National Association of Personal Financial Advisors.

To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.

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