To better understand the choices that investors face when evaluating financial advisers, Pew has examined how RIAs and dual registrants are compensated, what affiliations they have, and what actions they can take on behalf of their clients.
Researched and written by Pew staff members Theron Guzoto and John Scott, the issue brief (Choice of Financial Adviser Can Dramatically Affect Retirement Savings) offers something of a tutorial in how the variations in fees and compensation can make a difference to a retirement saver’s bottom line. The analysis focuses primarily on individual clients—particularly those classified as being non-high-net-worth or “retail” clients—who, the brief suggests, are most representative of the typical investor in retirement.
Guzoto and Scott explain that when older Americans retire, they face complex decisions that will affect their financial security, including whether to withdraw their retirement savings, move the funds from a workplace plan to an IRA, or keep them in a former employer’s plan. And to help navigate these choices, a third of retirees use a professional investment adviser, but choosing a potential investment adviser is itself a complicated process, including determining the full scope and cost of the services offered by an adviser.
To help with that, the brief explains how each professional providing investment-related services is regulated by a different entity, with different implications for investors. For example, registered investment advisers (RIAs) are certified by the SEC, while broker-dealers are regulated by FINRA, and the differing roles mean different methods of compensation.
For broker-dealers, compensation comes primarily from commissions on the buying and selling of securities, while advisers are compensated for the guidance that they give their clients. Broker-dealers, however, also often register with the SEC as investment advisers and are known as “dual-registrants,” and can earn both fees from investors and commissions from the product or investment being sold.
Consequently, even seemingly small differences in fees can significantly affect retirement funds, the brief argues, noting a retirement savings calculator from The Pew Charitable Trusts, for example, shows that a higher investment fee of just 1% can reduce a retiree’s assets by tens of thousands of dollars.
Additional research from Pew shows that despite the outsize impact that fees can have on retirement savings, few retirees consider low fees to be a significant factor when deciding how to invest, the brief further notes. Instead, they often place greater emphasis on investment options, control over their investments, and access to professional management and advice.
This may be due, in part, to the “oblique way” in which many fee disclosures are written and presented to investors, Guzoto and Scott suggest, noting that Pew studies have shown that only a third of retirement plan participants read the disclosures from their plan in the last year—and even when participants did read them, some 30% said they did not understand them.
Ultimately, they contend that the brief demonstrates how risky the financial adviser landscape can be for those nearing or entering retirement. “Retiree investors could—and should—do more to understand fee disclosures, but the complexity and opacity of disclosures about fees or conflicts of interest impose a heavy burden on even the most financially savvy in understanding how and what fees are charged,” the authors suggest.