Investors Prefer Commissions Over Fees
A study conducted by Cerulli Associates is very informative but reveals some rather disturbing statistics, as reported by Bloomberg and the Investment Advisor. Astonishingly, 33% of the investors surveyed had no idea how they paid for the investment advice they received and 31% thought that their broker or financial adviser provided them investment advice free of charge. The study was based on a Phoenix Marketing International survey that was conducted between August and December 2010, which targeted households having more than $50,000 annual income and over $250,000 in investable assets.
Of the 7,800 households surveyed, 47% preferred paying commissions rather than have a fee based arrangement where the broker receives an annual fee based on a percentage of the assets under management, billed quarterly. Over the last several years the financial industry has been moving more towards the fee based management programs. For example, roughly 66% of all financial advice providers were compensated on a percentage of assets under management in 2010 versus 46% in 2003. Obviously, if an investor is only going to trade a few times a year it is clearly more cost effective to pay a commission than 1% or so of your assets under management.
Another revealing statistic was that 64% of all surveyed believed that their broker’s standard of care owed to them was that of a fiduciary. Registered financial advisers do have a fiduciary obligation to put their clients’ interest first and above their own but brokers with the large firms generally are only held to the standard of making suitable investment recommendations to their customers. The SEC has recommended a common fiduciary standard for brokers and registered investment advisers in a report released early in 2011. Purportedly, a rule is in the making and scheduled for some time this year.