Jim Mitchel Shannon O Keefe. November 2010

Transcription

1 2010 Membership Survey Jim Mitchel Shannon O Keefe November 2010

2 Contents page Objective 3 Summary 4 Support for NAIFA s Positions 8 Survey Administration 10 Membership Survey Results 11 Consumer Survey Results 40 Appendix 51 2

3 Objectives The objectives of the research were to: 1) Provide statistically valid data related to NAIFA s position on fiduciary vs. suitability standard of care 2) Document membership involvement in securities 3) Gauge members behavior and views on: Existing regulations Concerns over a fiduciary standard How a fiduciary standard would affect their clients 3

4 Summary Membership Survey 63% of NAIFA s membership is involved in securities, either as a Broker-Dealer (B-D) or Registered Investment Advisor (RIA) representative, or both. They offer not only variable life and annuities, but also mutual finds, 529 plans, and individual stocks and bonds. 9 in 10 B-D reps offer some sort of planning services, most commonly retirement planning. 27% of NAIFA s members already are under a fiduciary standard since they are an RIA representative. Almost all are dual registered. Dual registered reps offer investment services, such as wealth management, investment management, or asset allocation. Transferring from commissions to fees would be difficult since very few NAIFA members charge fees now. 4

5 Summary Membership Survey continued NAIFA s membership spends about 500 hours and $9000 per year on compliance and securities examinations. They spend about ½ day per week on compliance and almost one third have hired staff to do compliance work. They spend about half a day on every compliance exam they go through, and 20% have direct costs for the exam. If compliance costs go up by 15%, they feel that half of their clients will take actions that will limit the availability of financial advice. A number of representatives have given up their registration (either B-D or RIA) partially because of compliance burdens. If compliance demands increase, more members could do the same, limiting the availability of financial advice to customers and potential customers. NAIFA s membership understands the difference between a fiduciary and suitability standard of care, but only half feel there is any practical difference between them. 5

6 Summary Consumer Survey The public needs financial advice since they profess only a fair level of financial knowledge. Despite the limited financial knowledge, only half have used a professional financial advisor. While financial planners are the most common professional financial advisor, consumer use a variety of different types of advisors and have bought securities from all types of advisors. Financial advisors are seen by consumers as providing a variety of services, with most providing both brokerage services and financial advice. A variety of models for providing financial advice are needed since many consumers are in a position to only invest limited amounts. Half of consumers that use professional financial advisors, have less than $50,000 invested. Half of all consumers say the could invest less than $1200 per year. This suggests the need for a low cost way for them to receive help investing. Consumers express some opposition to the financial planner/fiduciary model since only 1 in 4 pay their financial advisor a fee, and only 1 in 10 would pay an upfront $2500 fee for an initial analysis of their financial situation before investing. Consumers with a preference prefer paying a commission rather than a fee or a percent of assets invested. Consumers do not support a fiduciary standard over a suitability standard if there is an additional cost for the fiduciary standard. 6

7 Consumer Membership Results Issue NAIFA Membership Consumers Financial advice & brokerage services from same person Middle market access to financial advice Up-front fees vs. commissions Fiduciary 9 in 10 B-D reps offer planning (mostly retirement planning) and since B-D, can offer securities Some B-D reps offer both formal written advice and brokerage services Some comment about a fiduciary standard with high fees limiting access to advice Few charge fees, and if they do the average fee is around $3000 If cost rose 15%, half clients would take actions that would limit availability of financial advice Some members have given up securities involvement because of compliance and more regulation would limit number of financial advisors to serve consumers Consumer see all types of advisors offering both financial advice and brokerage services Those with investments typically have under $50,000 About half of the general public could invest less than $1200 per year so need low cost investment advice Only 1 in 4 prefer to pay up front for preliminary financial advice Only 1 in 10 would pay $2500 fee for initial advice Prefer commissions vs. fee or percent of AUM Do not support fiduciary standard if have to pay more because of increased costs. 7

8 Support for NAIFA s Positions A number of the findings relate directly to NAIFA s objectives in doing the survey. 1) NAIFA members provide affordable financial services to the middle market. 41% of member clients are middle market ($50,000 99,999 household income) 31% have less than $100,000 of net worth (excluding home) 51% of consumers who use financial advisors have under $50,000 invested 2) NAIFA members are already subject to comprehensive regulatory requirements. 63% of members are B-D and/or RIA representatives 70% had B-D exam - 23% had RIA exam 10% had Federal/State exam - 8% had insurance exam 80% have yearly B-D exam and 53% have random Federal/State exams 3) NAIFA members currently spend considerable resources to comply with existing Federal and State securities regulations. Those registered: spend 500 hours and $9000 per year 31% have hired additional staff to handle compliance 8

9 Support for NAIFA s Positions con t 4) A new standard of conduct will be counter productive. 75% of consumers believe advisors act in their best interest now 2 in 3 members feel that none or very few of their clients would notice a difference if there was a move from suitability to fiduciary standard if costs went up 15% because of fiduciary requirements, 65% of members would take actions that would limit access to financial advice (increase fees, limit clientele, or not sell securities) only 18% of consumers would support a fiduciary over suitability standard if there was a 15% cost increase to do so almost 1000 members gave up their B-D and/or RIA registration, mainly because of compliance burden 9

10 Survey Administration Membership Survey Web-based survey of active NAIFA members Questionnaire content was based on input from NAIFA Survey conducted from October 7 20, 2010 The survey was sent to 44, undeliverable Some home office and field managers found the survey inappropriate and did not respond 3,372 usable responses 8.2% response rate The margin of error for these results is less than + 2 percentage points Consumer Survey Internet survey by Opinion Research Corporation (ORC) Questionnaire content was based on input from NAIFA Survey conducted from October 11 13, ,008 U.S. adults age 18 or older Representative by gender, age, region, and race The margin of error for these results is + 3 percentage points 10

11 MEMBERSHIP SURVEY 1. NAIFA Member Profile 2. Clients 3. Business Model Sales Practices 4. Compensation 5. Current Compliance 6. Fiduciary Standard 11

12 1. Profile of NAIFA Members Title used: 71% insurance (agent, broker, or insurance and financial advisor) 22% investment (financial planner, wealth manager, registered representative, or financial advisor) 7% Other Securities Involvement 37% 26% 36% 1% B-D only RIA only Both (Dual) Not securities Based on comparisons to NAIFA s total membership database, the survey respondents have similar characteristics in terms of the applicant profile at most the sample differs by 2-3 percentage points, if there was any difference. This means the sample is representative of the 40,000 total membership. The I in NAIFA is still dominate, as most members consider themselves insurance agents. A majority of NAIFA s membership are involved in securities; only 37% are not. Most RIA representatives are dual registered. 12

13 Products & Services Offered 100% 99% Products 89% 100% Planning 80% 60% 60% 52% 80% 60% 47% 67% 56% 53% 40% 31% 40% 20% 0% 20% 0% 20% Life and health products (individual life, variable life, health, long-term care, and disability income) are sold by virtually everyone. Group products include group health, disability, long-term care, and other employee benefits. Retirement products include fixed and variable annuities, IRAs, and 401(k) products. 8 in 10 are involved in some sort of planning for their clients, most commonly retirement planning. Investment services include: financing the purchase of insurance or investments, wealth management, investment management, and asset allocation. 13

14 2. Clients 50% Household Income Net Worth (excluding home) All Security Clients Average Percent 40% 30% 20% 10% 17% 21% 20% 19% 12% 7% 4% Average Percent 50% 40% 30% 20% 10% 14% 7% 27% 23% 22% 20% 17% 16% 16% 14% 12% 12% 0% 0% 14

15 Securities Involvement N=2099 N=912 Securities Sold 100% 84% 80% 74% 53% manage assets 60% $23.2 million average AUM 40% 20% 0% Variable Life & annuities Equities 15% Partnership, etc. $332,336 average per client Earlier it was noted that about 6 in 10 members are licensed representatives of a broker-dealer so they are registered to sell securities. The vast majority of the reps sell equities (mutual finds, 529 plans, and stocks and bond) with 3 in 4 selling variable life and/or variable annuities. There is limited activity in private equity, partnerships, or REITs. Of these, REITs are the most common, with 10% of the members selling them. A little under 1 in 3 members are also RIA representatives, and about half of them manage assets for clients. This means that a significant number of NAIFA members could be subject to any SEC actions to implement a common fiduciary standard of care. 15

16 3. Business Model N = % are registered with a single B-D; do not have open architecture 41% of those involved in investments say they are dual registered with both B-D and RIA 92% of dual registered have the B-D and RIA as part of same firm Almost 6 in 10 NAIFA members would fall under the proprietary exemption to the standard of care in the recent Dodd-Frank legislation since they only have access to the products from their single broker-dealer. Some NAIFA members are already under a fiduciary standard since they are dual registered with a brokerdealer and a Registered Investment Advisor representative. 16

17 Sales Practices Initial meeting with client involves: B-D Only Dual or RIA Only Insurance Only Formal needs assessment 52% 57% 40% Review existing insurance General fact-finding Frequently discuss with clients how to pay premiums If discuss, frequently involves use of equities owned by the client in 10 members do a general fact-finding interview with a new client. There is no real difference between registered reps and insurance agents in the type of initial information obtained from a new client. Around 6 in 10 discuss how the prospect might pay premiums on any products they might buy. While the question was intended to see if financial advice is given, it appears the survey respondents interpreted it more broadly, such as annual vs. monthly payments. Registered reps do occasionally discuss the use of the client s securities to pay premiums. Insurance agent rarely do this, in fact 69% never discuss this. 17

18 Planning Provided by Status 100% 80% 60% 40% 20% 0% 93% 88% 79% 80% 77% 67% 66% 61% 56% 53% 47% 49% 44% 36% 32% 23% 20% 15% 8% 2% Financial Retirement Estate Investment None Total B-D Dual Insurance Insurance agents have limited involvement in any type of planning - 4 in 10 do no planning. Planning is much more the province of RIA representatives in fact only 2% are not involved in some kind of planning. Broker-dealer representatives are also involved in planning but to a lesser extent than RIA reps. Investment services include: financing the purchase of insurance or investments, wealth management, investment management, and asset allocation. The most common investment services are asset allocation and investment management, followed by risk management and wealth management. 18

19 4. Compensation Sources of Compensation Average Compensation Mix Commissions 96% Expense reimbursement Planning fees AUM fees 13% 12% 51% 3% 8% 9% 2% 1% Bonus Salary AUM fees Planning fees Salary 14% 77% Reimbursement Commissions Bonus 28% 0% 20% 40% 60% 80% 100% Virtually everyone reported receiving commissions as part of their yearly income. Over half (51%) reported receiving some trailer fees on assets under management. A notable number reported receiving a salary and/or bonus. These could be individuals involved in sales management since 14% of NAIFA s members checked general agent/manager as their producer type on the NAIFA membership file. Three quarters of the typical member s compensation comes from commissions - 9% comes from AUM fees and only 1% from providing advice or planning. 19

20 Compensation by B-D vs. Insurance B-D Dual Ins. Commissions 97% 97% 93% AUM Advice fees Exp. Reimburse. Percent Who Earn Salary Bonus B-D Dual Ins. Commissions 80% 66% 81% AUM Advice fees Exp. Reimburse. Average Mix Salary Bonus Compensation is very different for those who are registered reps as opposed to those who are dual registered. 85% of those who are RIA representatives collect AUM fees and over one third collect advice and planning fees. Two-thirds of B-D representatives get trailer fees, which are probably for annuities. Except for RIA representatives, fees are a small part of a member s total compensation. RIA representatives do earn just under 20% of their total compensation from AUM fees. + = < ½ % 20

21 Use of Fees Insurance Dual B-D Total No Fee Other Investment Advice Estate Planning Financial Planning 5% 3% 2% 3% 0% 2% 11% 1% 10% 1% 3% 1% 2% 9% 28% 38% 50% 82% 93% 94% With the exception of RIA representatives, virtually none of NAIFA s membership charge fees. RIA representatives most typically charge fees for financial planning and investment advice. The fees are most likely AUM trailer fees or some combination of different types of fees. Only a little over 1 in 4 of their clients pay fees, with a median fee of $1750, although the fees ranged from under $100 to $50,000 or more. 0% 20% 40% 60% 80% 100% Fees are based on: 35% AUM 6% Hourly rate 13% Flat fee for a service 2% Annual retainer 12% Quote a fee 32% Combination 27% of clients pay fees $3098 average $1750 median 21

22 5. Current Compliance 30% 20% 24% 20% 5.2 hrs. average 3.0 hrs. median 22% 17% 40% 30% 36% 28% 26% 31% hired staff $25,950 avg. per year $20,000 median 20% 10% 8% 9% 10% 10% 0% Hours per Week 0% <$10,000 $10,000-25,000 $25,001-50,000 Yearly Cost of Staff Over $50,000 Compliance affects virtually all B-D and RIA representatives, but a few insurance agents also feel they are subject to compliance exams. The insurance agents could be thinking of some of the recent Model Regulations for annuities or Medicare supplement restrictions. The cost of compliance includes both time and direct costs from hiring staff to handle compliance duties. Some members worry that new representatives coming into the business will not be able to afford the cost of compliance staff, which is typically $20,000 per year. 22

23 Examinations N= 2265 subject to exams Examined By Exam Frequency Broker-Dealer RIA 23% 79% B-D RIA Fed. Ins. Yearly 80% 45% 16% 31% Federal/State 10% 2 yrs 7% 8% 9% 15% Insurance 8% 3 yrs 5% 12% 19% 9% 0% 20% 40% 60% 80% 100% Random 8% 19% 53% 35% Never 0% 16% 3% 10% The most common compliance exam is the annual Broker-Dealer audit. Although they also have to be prepared for random visits from Federal or State securities examiners. 23

24 Average Cost of Examinations N= 2265 subject to exams B-D RIA Fed/State Insurance Avg. time (hours) Median time Had direct expenses 11% 4% 2% 2% Avg. expenses (if had) $1350 $1311 $2099 $1072 Median expenses $300 $250 $500 $200 Charged an annual fee 22% 16% na na Average fee charged $1604 $1353 na na Median fee $1100 $900 na na Most of a representatives cost of compliance exams is their time, but some do have direct costs. The typical representatives spends about a half day per examination. Very few members reported direct costs involved in preparing for, going through, and responding to subsequent reports from the exams. Of those that did, the expenses were typically in the range of $200 - $500, however some reported expenses of over $10,000. This could have been staff costs. Some B-Ds do charge the representative for the exam, which would be a direct cost. 24

25 Total Compliance Costs N= 2265 subject to exams For those involved in securities 526 hours per year = 10 weeks hours per year on compliance 12 hours per year on examinations $8,878 in direct costs $264 in exam expenses $569 in B-D and/or RIA annual fees $8044 in staff expenses for compliance The typical NAIFA member incurs considerable costs in compliance and securities examinations. These averages were computed based on the information from the prior slides for those members subject to compliance. Any additional regulatory obligations will obviously increase these expenses, and impose an additional burden. 25

26 No Longer Registered N = 613 that gave up B-D and N = 294 that gave up RIA 18% give up B-D and 9% gave up RIA Cost too high 14% Few securities sales 56% Switched 4% 20% Focus on insurance More growth 14% 13% 55% 58% RIA B-D More independence 18% 23% Compliance burden 56% 55% 0% 10% 20% 30% 40% 50% 60% 70% A number of NAIFA members reported that they used to be either a B-D representative or a RIA representative, but gave up their registration. The major reasons for giving up their registration were because of compliance burdens, limited securities sales, and a desire to focus on insurance products, which could be because of compliance issues. These findings suggest that further regulatory burden will drive more NAIFA members to give up their registration, which will limit the number of consumers who can benefit from their services. 26

27 6. Fiduciary Standard 89% understand the difference between fiduciary and suitability 92% of B-D reps 92% of Dual reps 82% of insurance agents (15% not sure) Most NAIFA members understand the difference between a fiduciary and a suitability standard. Insurance agents have slightly less understanding, but they are not under either of the standards, so that is understandable. 27

28 Concerns Only 51% feel a practical difference between fiduciary and suitability But 26% of insurance agents not sure 48% are not worried about possibly having to comply with a best interests fiduciary standard, with 23% not sure Reasons worried: 49% have to look beyond own B-D for products 39% will not be able to receive commissions 78% possibility of liability lawsuits About half of NAIFA s membership feel there is no practical difference between a fiduciary and a suitability standard. They feel they do what is best for their clients and build their clients trust regardless of the regulatory standard of care. Only about 3 in 10 are worried about having to comply with a fiduciary standard. The main worry is the liability. They comment that the regulations only cover procedures, not the end result of what is right for the client. They worry about getting caught on procedural details. 28

29 Impact on Clients of Fiduciary N= 2125 involved in securities Percent Believe Clients Would: Act Differently with Clients Understand difference 58% 21% 22% Yes Notice difference 66% 0% 25% 50% 75% 100% Percent Very Few/None 56% No Not sure Over half of NAIFA s membership believe that very few or none of their clients understand the legal difference between a fiduciary and suitability standard. More (66%) feel very few or none of their clients would notice a difference in how they (the representative) deal with them (the client) if there was a move to a fiduciary standard. The members comment that their clients don t care about the legal disclosures because they cannot understand them. The reason the members feel that clients would not notice a difference is because only 1 in 5 of the members say there would be a practical difference in how they interact with clients if they had to adhere to a fiduciary standard as opposed to a suitability standard (demonstrate that they act without regard to their own financial interests and only recommend products that are in the client s best interests). 29

30 Impact of Added Expense N= 2125 involved in securities 51% believe a fiduciary standard would increase their costs, with 28% not sure If costs went up 15%: 35% would absorb cost increase 14% would increase fees charged 31% limit practice to upscale clients 20% not sell securities Percent Clients Could Afford 15% Increase 6% 14% 5% 34% 15% 17% 9% 0% 20% 40% 60% 80% 100% All Most A Lot Some Few Very Few None About half of NAIFA s membership believe that a mandated move to a fiduciary standard would increase their costs. Given the existing compliance costs, it is not surprising that such a move would significantly impact consumers. If regulatory expenses went up 15%, over half the respondents say they would take actions that would limit consumers access to financial products get out of securities product sales, or limit their practice to clients with a minimum about of assets. The respondents are split on whether their clients could absorb a 15% increase in cost 35% say all, most, or a lot could absorb the cost, but a similar number (41%) say few, very few, or none could absorb the cost. While there is some uncertainty, we can conclude that a cost increase would impact a good number of consumers. 30

31 Clients and Fees 43% of clients have sometimes asked about commissions members earn on products Of those charging fees: 38% regularly give clients a choice of commissions or fees 21% rarely give choice 41% never give choice Those involved in securities believe about half (48%) of their clients would continue to do business with them if they had to charge fees instead of commissions Of those that would not accept fees: 49% do-it-yourself without advice 15% change to another fee-based advisor 36% not invest anymore in securities One view of many regulators is that fees lead to less bias than commissions. If this is the case then consumers should prefer fees over commissions. However, the respondents do not report a majority of consumers asking what they earn in commissions on a product. If forced to fees, they believe that the majority of those clients that would not continue doing business with them would go without financial advice either using online brokerage without advice or not invest anymore in securities. Those members involved in securities believes that moving to fees would harm their clients. 31

32 CONSUMER SURVEY 1. Demographics 2. Current Financial Situation 3. Advisors Used 4. Value of Advisor 5. Advisor Compensation 6. Fiduciary Standard 32

33 1. Demographics Sample = 1008 Gender: Household income: Male 48% <$25,000 12% Female 52% $25,000 49,999 29% Age: $50,000 74,999 24% 29 or less 20% $75,000 99,999 17% % $100,000 or more 18% % % Employment Status: 65 or older 17% Working 59% Not working 22% Retired 19% The data has been weighted to reflect the U.S. population on age, sex, geographic region, and race. The majority (41%) are middle-class, i.e., household income of $50,000 to $99,999. Not working includes students, housewives, and unemployed. 33

34 2. Financial Situation N = 1008 Very Fairly Not very Not at all Financial Knowledge 14% 66% 18% 2% 0% 20% 40% 60% 80% 100% 50% By Household Income 40% 30% 20% 10% 0% 30% 44% 26% 6% 22% 23% 17% 17% 17% 17% 15% 14% 14% 10% 6% The public admits to limited financial knowledge, with 86% saying their level of financial knowledge is only fair or less. This suggests the public needs professional financial advice. The results are similar to the SEC RAND study, where 10% considered their financial knowledge to be only good or advanced. The middle-market ($50,000 to $99,0000 of household income) is quite spread in the amount they feel they could invest with a professional advisor, if they were to invest beyond their employer provided retirement account. With this variation in amounts, there is a need for a variety of ways for them to invest. 41% 19% 14% 19% None <$100 $ $250 + Not sure Amount Could Invest Per Month 29% Total <$50k $50-99 $

35 3. Use of Advisors 50% have used a financial advisor Financial planner Insurance & financial advisor Stockbroker Wealth manager/ Investment advisor Banker Accountant Other 3% 6% 8% 17% 16% 19% 31% N = 503 0% 10% 20% 30% 40% 50% About half of American households use, or have used, a professional financial advisor. Women, those over age 55, and more affluent households are more likely to make use of professional financial advice. The proportion using professional financial advisors is similar to other studies ( e.g., the SEC RAND study where 47% said they use a financial advisor). Financial planners are the most common type of advisor, but Americans use a variety of different professional financial advisors. The type of advisor used has little relationship to demographics, other than households age 45 and older are more likely to use a financial planner and the college educated are more likely to use a wealth manager. [Note that insurance and financial advisor includes insurance agent & broker and stockbroker includes both full-service and online. Questions about advisors based on 503 respondents who used an advisor.] 35

36 Advisor s Services N = % 75% 50% 25% 0% 4% 1% 0% Services Provide to Clients Broker Planner Insurance Other 13% 11% 9% 7% 20% 24% 20% 55% 17% None of these Not sure Insurance servcies 78% 64% 49% 35% Brokerage services 55% 83% 69% 59% Financial advisory 100% 75% 50% 25% 0% 48% Products Bought Broker Planner Insurance Other 27% 28% 26% 20% 22% 22% 24% 14% 16% 15% 10% 86% 80% 57% 55% 32% 23% 23% 19% There is some specialization in services offered by various types of advisors, e.g., those who used planners are most likely to say the advisor offers financial advice. However, for all three types of advisors brokers, planners, and insurance - at least half of the consumers using them say they offer both brokerage and advice. Insurance products are most often obtained from insurance professionals and securities are most often obtained from brokers and planners. However, over half of consumers obtained securities from all four types of advisors. The conclusion is that consumers use a variety of types of advisors, and advisors provide a variety of services, e.g., planners do not provide only advice; they also sell products. [Note that Planners include both financial planners and wealth managers, and Insurance includes both insurance and financial advisor and insurance agent & broker. 10% 7% 2% 31% 36

37 Amount Invested by HH Income N = % 40% 20% 0% 46% 33% 35% 25% 18% 16% 15% 13% Total <$50k $50-99 $100k + 36% 36% 30% 30% 24% 19% 19% Nothing <$50k $ $250+ Amount Invested 5% Half (51%) of consumers who have used financial advisors have nothing or less than $50,000 invested with professional advisors. Most middle-income consumers have limited amounts invested, although some do have up to $250,000 or more invested. This implies considerable variety in the investment needs of middle-market America some need low-cost help, while others have enough invested to be able to pay for extensive financial advice. 37

38 4. Value of Advisor N = 503 SA/A Neither SD/D NS Broker Insurance Planner Other Provides valuable service 73% 16% 8% 3% Provides valuable service 62% 75% 77% 70% Trust acts in my best interests 75% 14% 8% 3% Trust acts in my best interests 64% 78% 80% 68% Very satisfied with services 70% 16% 11% 3% Very satisfied with services 59% 73% 74% 71% 0% 25% 50% 75% 100% 0% 20% 40% 60% 80% 100% % Strongly agree/agree Almost 3 in 4 U.S. households that use professional advisors have a favorable opinion of the advisor. This is similar to the SEC RAND findings. There was no difference in the opinion of the advisor by any demographics. There were statistically significant differences in the opinions by type of advisor. Stockbrokers were less favorably received on trust and value of services. Insurance advisors were quite similar to planners. 38

39 5. Advisor Compensation N = 503 How Typically Pay Advisor If $2,500 Fee for Initial Analysis Per trade 5% 5% Not mind 27% 14% Commissions 19% Pay it 14% 25% 20% Fee Fee & commissions Not sure 35% 36% Another advisor Do it myself Not sure Households that use professional advisors pay them in a variety of ways with no one method dominating. Those under age 34 are more likely to pay on a per trade basis and women are less sure of how the advisor is paid. Only 1 in 4 households pay their advisor only by fees. This suggests that consumers could be opposed to fees for financial advice. When asked their reaction to an up front $2,500 fee for an initial analysis of their situation before they invest any money, only 1 in 10 would pay. Over 7 in 10 (71%) would either look for an advisor that charges less or not use an advisor at all, but rather do it themselves. This suggest some opposition to the typical financial planner/fiduciary model. 39

40 Preferences on Compensation N = 1008 Preferred way to pay professional advisor Preferred way to pay for preliminary financial analysis Commission Pay upfront 36% 13% 10% 25% 16% Fee Percent of assets No preference Not sure 33% 44% 23% Absorbed by advisor through commissions No preference Most consumers are not sure how they want to pay a professional advisor since many of them have never used a professional advisor. Of those with a preference, the majority lean toward commissions. There is some preference for fees among the more affluent. These results are at odds with the prior slide where consumers that have used advisors are more likely to pay them by fee than commission. This suggests some consumers pay the way the advisors wants, rather than how they prefer to pay. If consumers needed an analysis of their situation before they received investment advice, the majority (44%) would prefer that the cost of the analysis come out of commissions earned by the advisor. Again this does not fit the planner/fiduciary model where there is worry commissions will bias the advice. 40

41 Choice on Compensation N = 1008 People want a choice between fee or commission 5% 42% 53% Strongly Agree/Agree Neither/DK Strongly Disagree/Disagree Consumers are confused on whether people want a choice in how to pay financial professionals. This could be because they have little experience themselves so are not sure how others might feel. Very few disagree that people want a choice between fees or commissions. By a 10 to 1 margin, among those that have a preference, people think people want a choice. 41

42 7. Fiduciary Standard N = 1008 Support fiduciary even if buyer s cost increases How much increase accept 63% 60% 27% 43% 18% 12% Yes No Depends on cost Don't know 40% 20% 0% 24% 8% 3% 2% 1% 5% 10% 20% 30% 40% >40% Increase of Many consumer studies report that people want all advisors to follow a fiduciary standard and put the client s interest first. However if you add in an extra cost for the fiduciary standard, then consumers are considerably less likely to support a fiduciary standard over a suitability standard. The vast majority say it depends on the cost, and most would not accept an additional cost beyond 10%. [See appendix for actual question wording.] 42

43 Appendix Currently, those who sell securities products (i.e. mutual funds, stocks, bonds, variable insurance) legally must recommend only products that are appropriate or suitable for buyers. What is suitable is based on the buyer s personal financial information. A new proposed federal rule may change the suitable requirement to a best interest requirement otherwise known as fiduciary. Proponents of the rule argue that fiduciary is better for consumers than suitable. The legal implications of the change may increase the seller s business costs which may be passed onto the buyer. Would you support the idea that sellers of securities products should operate under a fiduciary standard -- even if the buyer s costs increase as a result? Yes No Don t know Depends on how much costs would increase How much of an increase could you accept before you would no longer support the fiduciary standard? 5% 10% 20% 30% 40% More than 40% A1

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