The Office of the Investor Advocate released its “Report on Activities for the Fiscal Year 2018” (the “Report”). During the 2018 fiscal year, the Investor Advocate focused significant attention on proposed Regulation Best Interest and on the standard of conduct applicable to broker-dealers and investment advisers. In the Investor Testing section of the Report, the Office summarized some of the key findings from its survey, “Research on the Market for Investment Advice.” These findings, which are summarized below, should help inform the Commission’s consideration of proposed Regulation Best Interest:

Most investors do not currently receive financial advice regarding their assets. Consumers were asked whether they are currently consulting a financial professional regarding their investment strategies, the type of account to open, or specific financial investments. The aim of these questions was to determine the percentage of investors that receive financial advice from professionals. Only 38.7% of consumers responded “yes” to one or more of these questions. This research shows that the majority of investment decisions are not informed by professional advice. The cost associated with finding and screening an investment professional was among the leading reasons that investors cited for not seeking professional advice. The finding that the majority of investment decisions are not professionally informed may be a cause of concern for regulators.

Most consumers of investment advice turn to “dual-hatted” professionals. The majority of financial advice consumers receive is delivered by a dual registered broker-dealer and investment adviser. Only 3.8% of advice seekers work with a professional that is exclusively registered as a broker-dealer. The majority of consumers were unable to identify the correct legal status of their financial professional.

The general public does not understand the obligations arising from the requirement to act in the customer’s “best-interest.” A survey of investor understandings of the term “best interest” found that 73% of investors believe that the reference to “best interest” requires financial professionals to help them choose the lowest cost product; all else being equal, 6.1% thought that it required professionals to avoid taking higher compensation for selling one product when similar but less costly products are available, and 86% thought that it required professionals to monitor their account on an ongoing basis. However, the proposed best interest standard applies to broker-dealers who are generally not required to actively monitor accounts as part of their service offerings. Furthermore, it is unclear whether the best interest standard would require professionals to choose the lowest cost product.