Findings reveal important areas for advisors to educate and manage clients’ expectations
Conversations around fees have moved further into the spotlight as a result of the CRM2 regime instituted by the Canadian Securities Administrators (CSA). And if a new study from the US is to be believed, American clients are in need of such discussions as well.
In Investors in the United States: A Report of the National Financial Capability Study, the FINRA Foundation shared insights it drew from a survey of more than 2,000 individuals with investments in nonretirement accounts, most of whom also invested in retirement accounts.
According to the survey, just over half of the participating investors (56%) believed that they pay fees or commissions for trades, while almost half said they pay account service fees. Forty-two per cent said they pay for fees and expenses on mutual funds, while 20% said that they also pay fees for advice.
But further analyses revealed an apparent shortfall in awareness of investment fees. While more than half of mutual-fund owners report paying mutual-fund fees or expenses (57%), nearly a third (32%) appeared to not know that they were paying these fees, and 10% do not know how much they are paying. As for those who frequently talk with a professional about investment options, 60% said they do not pay fees for investment advice.
“Furthermore, 14% of all respondents do not think that they pay any fees, and 17% do not know how much they pay in fees,” the report said. “A plurality of all respondents (43%) feel they pay less than 1% annually in fees for their non-retirement accounts.”
Adding to the concern, according to FINRA’s research director for investor education Gary Mottola, is the fact that nearly 60% of investors said they were confident in their ability to understand fees.
“Generally speaking, investors feel pretty confident on understanding fees, but the data shows something different,” he said in an interview with WealthManagement.com.
A broader gap was brought to light in a 10-question multiple-choice quiz that tested respondents on various investment-related topics and concepts. FINRA found that only 30% of respondents were able to answer at least six questions correctly, suggesting limited sophistication or knowledge of investing among the population.
The participants scored poorly on a question about past performance, where nearly half (46%) said that such information presents a good indication of future results. In another question about index funds, only 30% correctly identified generally lower fees and expenses as the products’ main advantage over active funds.
“When we ask people to rate their knowledge on financial matters, it’s higher than when we objectively measure it,” Mottola said.
Investors also tended to be overconfident when it came to projecting investment performance. Only 4% of respondents believed their portfolio will underperform the market, while 29% thought their portfolio will outperform. Expectations of market-beating results were also found to be higher among men than women (32% vs. 25%).
“Despite the stock market drop in February of 2018, a few months before the NFCS was fielded, investors’ confidence in the long-term prospects of U.S. financial markets has increased somewhat relative to 2015,” the report said. “Despite the stock market drop in February of 2018, a few months before the NFCS was fielded, investors’ confidence in the long-term prospects of U.S. financial markets has increased somewhat relative to 2015.”
