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Hearts & Wallets: Fewer investors are turning to financial professionals

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Fewer investors are turning to a financial professional as their primary provider for investment advice, according to a new survey from Hearts & Wallets LLC.

The report indicates that less than two-thirds of investors now use a financial services professional. Just 21 percent of investors say they use a financial professional as their primary provider of investment advice, down from 25 percent in 2011.

Usage dropped sharply among households with $100,000 to $500,000 and $2 million plus in investable assets, the report states.

The report adds that nearly six in 10 (57 percent) investors rely on family and 47 percent turning to friends. Emerging investors put the most trust in friends and family, coming in at 64 percent for friends and 82 percent for family.

“Fewer individuals are turning to financial professionals for advice,” says Hearts & Wallets Principal Laura Varas. “Hearts & Wallets believes this is because the industry is unable to fulfill the three screaming investor unmet needs as expressed in more than 60 Hearts & Wallets focus groups over the past three years. Ordinary Americans are frustrated with brokers, financial planners and other advisors because their value proposition is unclear, pricing is opaque, and there is no way to evaluate providers except to measure absolute return.

“At the same time, there are many proof points that obtaining professional help leads to better outcomes,” Varas adds. “Full-service distributers must address these issues, and product manufacturers should do everything they can to help in this effort.”

Banks and self-directed firms gained market share in primary relationships at the expense of full-service firms, the study indicates. The primary firm is the firm with the largest share of household investable assets under management (AUM).

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The decline of full-service firms was particularly strong in 2012, the report states. This drop occurred for primary relationship and also “intent to invest more” and “intent to recommend.” Those two measures are components of the Hearts & Wallets Score, the measure of individual financial services firms’ positions with Accumulators, or mid- and late-career investors ages 28 to 64 who do not consider themselves pre-retirees.

Most firms experienced a decline from 2011 to 2012 with only Vanguard and T. Rowe Price making sizeable gains.

“Even self-directed firms like USAA, which have previously had consistently high scores, saw a drop in their Hearts & Wallets Score,” says Chris Brown, Hearts & Wallets partner. “Some full-service firms had very low scores.

“Investors just aren’t sensing enough value for their dollar,” Brown adds. “They lack an understanding of financial services’ costs of goods sold, which are impossible to estimate without a tangible product to evaluate. Therefore, they often assume they’re being ‘ripped off’ by firms [that] offer professional advice.”

Banks upped their primary relationships from 43 percent to 47 percent in one year.

Self-service brokerages lead in share across other wealth segments. Full-service brokerages’ share of households with $1 million or more fell sharply to 32 percent in 2012 from 36 percent in 2011, the report states.