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SEC Investor Advocate, RAND Issue Retail-Advice Report

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The Securities and Exchange Commission’s Office of the Investor Advocate and the RAND Corp. have released research that aims to help the SEC craft its advice-standards package for brokers and advisors.

The 156-page research report, The Retail Market for Investment Advice, was undertaken prior to (and is separate from) the SEC’s release of the proposed standards of conduct rulemaking package.

However, the think tank and the Investor Advocate’s office state that because the research provides data that may be relevant to the commission’s consideration in the rulemaking, they submitted it to the public comment file.

Investor testimony about the commission’s proposed Form CRS Relationship Summary, they state, is expected to be made available in the comment file in the near future.

The RAND/Investor Advocate report is the result of literature reviews, focus groups and a survey to assess initial conditions and documents tied to new information about investor interactions with financial professionals.

The findings are based on newly collected data from focus groups and surveys.

“These qualitative and quantitative data help us understand current investor views on financial advice,” the report states.

Micah Hauptman, financial services counsel for the Consumer Federation of America, told ThinkAdvisor Wednesday that the report “confirms what we already know regarding retail investors’ lack of knowledge about critical differences” between broker-dealers and investment advisors.

“Rather than preserving hazy distinctions between the two, which retail investors won’t be able to understand, the SEC should provide the same strong protections for brokers and advisors alike,” Hauptman said. “That standard should follow the framework Congress set out in section 913(g) of Dodd-Frank.”

More Findings

The report identifies specific social, economic and cognitive barriers to understanding the differences in investment advice providers, including the associated costs and services offered.

For instance, the literature review shows the current state of investor knowledge about broker-dealers and investment advisors.

The review focuses explicitly on the research literature concerning two main topic areas: What leads investors to seek and use investment advice? And do investors understand the distinctions between different types of financial professionals?

Existing research on investors’ use of providers of financial advice has identified two important factors: investors’ financial literacy and their feelings of trust in advisors, according to the report.

“Research consistently shows that investors who are more financially literate are more likely to seek out investment advice, suggesting that financial advice might not be a sufficient substitute for low financial literacy,” the report states.

Once an investor is working with a financial professional, “the likelihood of following the investment advice is higher when the advisor is seen as more trustworthy; in turn, trust is affected by advisors’ communication style, credentials and other factors,” according to the report.

The report goes on to state that “further studies to determine whether investors who do not use professional advisors are less financially literate and have more-negative perceptions of advisors might be useful.”

— Check out Final SEC Advice Standards Package Coming September 2019 on ThinkAdvisor.


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