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‘Suitability’ Versus ‘Best Interest’ Still Commonly Misunderstood by Investors

New survey results show that nearly half of Americans incorrectly believe all advisors are legally obligated to act in a client’s best interest.  

According to findings in Personal Capital’s 2019 Financial Trust Report, 48% of survey respondents mistakenly believe that all financial advisors are required by law to always act in their clients’ best interest. This level is even higher for those who currently work with a financial advisor, where 65% of investors incorrectly believe that financial advisors only make recommendations that are in their best interest – an increase from 46% in 2017. 

These findings come on the heels of a years-long public debate between regulatory bodies over fiduciary rulemaking that has focused on the definition of “best interest,” which may be contributing to the increased public confusion, the report observes.  

Advisor Loyalty  

While investors may presume that some financial advisors have bad intentions, nearly all trust their own advisor. According to the findings, 30% of survey respondents think a financial advisor is likely to take advantage of a consumer, but 97% trust that their own financial advisor will act in their best interest. 

Further underscoring the lack of awareness around advisors’ legal obligations to their clients, 18% of the investors surveyed did not know whether their advisor is a broker/dealer or a fiduciary. 
When making investments, the survey found, investors are more likely to trust an RIA (28%), followed by a bank/brokerage firm (21%), a local advisory company (14%) and an online platform or mobile application that offers financial advice (8%). A third of respondents said they wouldn’t trust any of the listed options. 

The survey also shows that investor loyalty falls more to their advisors than their financial institutions. According to the findings, 71% of investors indicated they would move with their financial advisor if he or she switched institutions after the institution was involved in a scandal. Millennials appear to be the most loyal, with 80% indicating their willingness to follow their advisors to a new institution, compared with 70% of Gen-Xers and 66% of Baby Boomers. 

Trust in Fintech 

A strong majority of respondents (78%) think the widespread adoption of technology within financial services is a positive development, claiming that convenience (74%), ease of use (69%) and its ability to help them better understand their finances (44%) are the top benefits. Not surprisingly, receptivity to fintech increase with age. According to the findings, 87% of Millennials view fintech positively, but the number declines to 79% for Gen-Xers and 72% for Baby Boomers.

Among the 22% of respondents who view the widespread use of fintech negatively, the top concern is cybersecurity, at nearly 70%, followed by preference for traditional financial interactions at 46%. Despite their concerns about cybersecurity, however, 92% of investors who use a financial advisor believe their personal and financial information is safe with their financial institution. 

The report is based on findings of a CARAVAN survey conducted by Engine among a sample of 2,007 adults, with online interviews taking place Dec. 10-16, 2018.