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J.D. Power Survey: Many Investors Prefer Commissions

In its latest special report, J.D. Power & Associates surveyed more than 1,000 full-service investors on their perceptions of the Department of Labor’s fiduciary rule and found that more than half of investors – particularly those with more than $1 million in investable assets – are resistant to switching to a fee-based investment model.

“While the annual Full Service Investor Satisfaction Study supports the intuitive hypothesis that current fee-based investors are generally more satisfied with what they pay their firm than those who pay commissions,” said Mike Foy, director of the wealth management practice at J.D. Power. “Findings of J.D. Power’s DOL Special Report show there is significant resistance among those commission-based clients—especially the high net worth—to being forced to migrate to fees.”

According to the DOL special report, 59 percent of investors currently paying commissions said that they are unwilling to switch to a fee-based model, with 19 percent stating that they definitely would not be willing to switch and 40 percent stating that they probably would not be willing to switch.

The remaining 41 percent said they would be willing to switch to fee-based model – split between 8 percent who are definitely willing to switch and 33 percent that are probably willing to switch.

The study also found that high net worth investors with more than $1 million in investable assets are more resistant to changing to a fee-based model compared to other investors.

One-quarter of high net worth investors said that at a proposed 1 percent fee, they definitely would not switch from a commission-based model. At a proposed 2 percent fee, more than half, or 52 percent of high net worth investors said they definitely would not switch.

Validators , a group of younger investors J.D. Power describes as wanting to be actively involved in investment decisions and view their financial advisor as a sounding board for ideas, are also resistant to switching to a fee-based model. Of this group, 26 percent said they definitely would not switch, and 35 percent said they probably would not switch.

JD Power also found that investors that are 52-years-old and younger are more open to engaging in self-directed, limited, and/or digital advice platforms than their older and higher net worth counterparts.

More than half, or 56 percent, of this group said that they would consider a robo-advisor as an alternative to traditional advice, as opposed to 19 percent of investors aged 53-years-old and older.

If they want to continue paying commissions, 62 percent of the younger cohort said that they would consider a self-directed platform compared to 36 percent of the older group.

“The good news for firms that provide these alternatives is that many younger investors appear open to both, though older and more affluent clients may be more likely to seek another full-service firm that will continue to support commission-based retirement, of which there will be many, especially if the DOL rule is ultimately not implemented and the Best Interest Contract Exemption (BICE) requirement is dropped,” said Foy.

“Firms that don’t have alternative service models to offer clients are likely to lose clients across the board, and in some cases their advisors may leave with them,” he added.

Headquartered in Costa Mesa, California, J.D. Power and Associates is an global marketing information services company that conducts surveys of customer satisfaction, product quality, and buyer behavior for industries ranging from cars to marketing and advertising firms. Private investment group XIO Group acquired the company in 2016.

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