New Survey of NAIFA Members Shows Fiduciary Standard Could Negatively Impact Services to Middle-Market Consumers
Separate survey of 1,000 consumers shows only 17% can afford to invest more than $250 per month, indicating need for affordable investment advice
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FALLS CHURCH, VA (December 17, 2010) — An analysis of two surveys – one involving consumers and the other NAIFA members – shows that consumers with household incomes in the middle-market range represent a core client base of NAIFA members, and if a universal fiduciary standard of care is imposed under the Wall Street Reform law, many members would be forced to discontinue providing some services to middle-market clients.
According to the survey that polled 3,372 NAIFA members, most members involved in securities activities believe that the legal implications of a fiduciary standard will increase their compliance costs. If NAIFA members’ compliance costs go up 15 percent, 65 percent of NAIFA members said they would need to take action that could limit access to financial advice, such as:
- 31 percent say they would limit their practice to affluent clients only
- 20 percent would not offer securities to their clients
- 14 percent would increase fees for their clients (41 percent say “few,” “very few,” or “none” of their clients could absorb an increase).
The survey, which was conducted by LIMRA International on behalf of NAIFA, also found that one out of five members surveyed who were once licensed as a registered representative of a Broker-Dealer or as an Investment Adviser Representative said they gave up their registrations and no longer offer securities to clients, primarily due to existing compliance responsibilities. (The NAIFA members who are involved in securities say they and their staffs devote more than 525 hours and spend an average of almost $9,000 a year on compliance, according to the survey.)
“These findings are particularly relevant to NAIFA because many of our members are community-based small business owners who provide affordable insurance and financial services to the middle-income market,” NAIFA President Terry K. Headley said. “As the SEC examines how financial regulations are working to protect the investing public, we need to be aware of the impact a universal fiduciary duty would have on our members’ ability to continue to serve this important market. These results show that further regulation will drive more NAIFA
members to give up their registrations or discontinue services, both of which would limit the number of consumers who can benefit from our services.”
According to the membership survey, most NAIFA members agree with recent surveys that indicate “very few” if any consumers understand or would notice the legal difference between a fiduciary or suitability standard. In fact, more than half of NAIFA members surveyed (56 percent) said they would not act differently with their clients if they had to adhere to a fiduciary standard, with just one out of five saying there would be a “practical difference” in how they interact with their clients if they were under a legal fiduciary standard.
Headley said this finding is not surprising: “Our members are heavily regulated under the suitability standard of care, which I believe is a robust and rigorous regulatory system that rivals the fiduciary standard of care. As business owners in their communities, NAIFA members see their clients every day – at places of worship, schools, grocery stores and as neighbors. Unless there is a relationship of trust and ethical behavior on the part of the financial professional, there is no way their business can survive. The need and desire for NAIFA members to serve clients ethically and in their best interests ensures a vigorous level of investor protection that rivals any new standard that may be put in place,” Headley said.
About NAIFA members’ clients
According to the member survey, 58 percent of NAIFA members’ clients have household incomes of $99,000 or less a year:
- 17 percent earn less than $50,000 per household
- 41 percent of clients earn $50,000-$99,000
- 12 percent of clients’ household incomes is between $150,000 to $250,000, with only 11 percent earning more than $250,000 per year.
Clients by and large pay for NAIFA member’s services through sales commissions:
- The majority of NAIFA members’ compensation (77 percent) comes from commissions
- Nine percent comes from assets under management fees
- Just two percent comes from set fees for providing financial advice or planning.
“NAIFA members are proud to serve this market. My concern is that a fiduciary standard – as a ‘one-size-fits all’ cookie-cutter approach to the investing public – will raise the cost of doing business and disenfranchise the middle markets by limiting their freedom of choice and access to advice, products, and services,” Headley said.
(According to the U.S. Census Bureau, 80% of Americans’ earn less than $100,000 a year; 44% earn $35,000-99,999.)
The Consumer Survey
The survey of 1,008 consumers, also conducted by LIMRA, indicates that consumers need financial advice. The majority of respondents (86 percent) described their level of financial knowledge as only “fair” or less than fair.
When asked how much they could afford to invest per month, 30 percent responded “none,” and 17 percent of all consumers said they could afford less than $100 a month.
More than half of consumers with household incomes of $50,000-99,000 who said they have used a financial advisor have less than $50,000 (or nothing) invested. According to the survey:
- 16 percent say they have nothing invested
- 35 percent have between $1 and $50,000 invested
- 30 percent have between $50,000 and $249,000 invested.
Some 55 percent of the respondents in this income category said they have money available to invest, though of this group, just 17 percent said they could invest $250 or more per month.
In addition, of those who are using professional advisors, one in four pays their advisor only by fees, suggesting that consumers could be opposed to fees for financial advice. When asked their reaction to an upfront fee of $2,500 for an initial analysis of their situation before they invest any money, just one in 10 said they would pay the fee, and seven in 10 said they would either look for an advisor who charges less or not use an advisor at all. When asked whether consumers should be given a choice on how they pay for services (fee or commission), 91 percent of those with an opinion said investors should have a choice.
“Very few of NAIFA members charge up-front planning fees, as opposed to some investment advisers who charge thousands of dollars to their more wealthy clients,” Headley said. “Similarly, many investors do not have large enough portfolios to satisfy the large minimum balances that nearly all investment advisers require.”
The survey also confirms previous 2008 SEC Commissioned RAND Study findings that most consumers are happy with their financial professionals. Three-quarters of those surveyed agree or strongly agree that they trust their advisors currently act in their best interests. Nearly as many say their advisors provide them with valuable services (73 percent) and that overall they are very satisfied with the advisor’s services (71 percent).
For additional resources, visit www.naifa.org/ServingMainStreetInvestors/.
About the Surveys
LIMRA conducted a Web-based survey of active NAIFA members during the time period of Oct. 7-20, 2010. Results are based on responses from 3,372 NAIFA members with a margin of error of plus or minus two percentage points.
LIMRA facilitated an Internet survey by Opinion Research Corporation conducted Oct. 11-13, 2010. Results are based on responses from 1,008 U.S. adults age 18 or older, representative by gender, age, region and race. The margin of error is plus or minus three percentage points.
About NAIFA: NAIFA comprises more than 700 state and local associations representing the interests of approximately 200,000 agents and their associates nationwide. NAIFA members focus their practices on one or more of the following: life insurance and annuities, health insurance and employee benefits, multiline, and financial advising and investments. The Association’s mission is to advocate for a positive legislative and regulatory environment, enhance business and professional skills, and promote the ethical conduct of its members.
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