Americans today face a far different and more challenging financial landscape than previous generations. The disappearance of the old-fashioned employer pension plan and the likelihood that future benefits from government social programs such as Medicare and Social Security will be less generous than in the past are just two reasons why individuals are increasingly anxious about their financial security.
Workers and retirees are assuming greater responsibility for their financial well-being, requiring them to make difficult but important saving, investment and tax decisions. Since they often lack the skills to do so many are turning to financial professionals for help. Those who do have their work cut out for them.
A 2008 RAND Corporation study commissioned by the U.S. Securities and Exchange Commission concluded that although retail investors felt they understood the difference in services offered by different financial industry representatives, further examination revealed they did not. Angela Hung, the study’s lead author, a RAND economist with a PhD from Caltech, remarked that even she found it difficult to disentangle the services and business relationships of many of the industry participants.
“So it isn’t surprising that the typical investor finds it hard to understand the nature of the investment advisory or brokerage businesses.”
At a time when more Americans are seeking trustworthy financial assistance, they are confronted by an industry comprised of a complex web of interrelationships, compensation arrangements and complicated products designed to generate income for those selling them rather than for the investor. Add to that the use of confusing professional-sounding designations by salespeople, many of which are pure marketing tools that can be acquired with minimal effort and a few hundred dollars. It’s no wonder the average consumer is hard pressed to decide who can be trusted.
Ultimately the responsibility for making sound financial decisions including how to distinguish among the myriad of financial, legal and tax professionals falls squarely on each of us. Yet as the RAND study demonstrates, most Americans are poorly equipped to shoulder that responsibility. Even those in higher level wealth & education groups are surprisingly overconfident but unprepared to make this basic but important decision in an informed manner. Most investors struggle to distinguish between the types of financial professionals, their specific legal obligations to clients, the quality of their service offerings and their compensation schemes.