Your 401(k) statement shows a dramatic drop. You wonder if bonds are a good idea. You're worried about saving for college. Where do you turn for help? According to a recent survey, many people turn to their fund companies.
Banks and fund complexes ranked as the two most trusted sources for financial information, with financial planners and accountants not far behind. Stockbrokers, corporate executives and insurance salespeople received the lowest ratings in the survey.
TowersGroup, a public relations and consulting firm in New York specializing in financial services, commissioned the survey to explore the investing public's perception of investment advice following the Enron scandal. The survey asked 363 investors to rank the honesty and integrity of various sources of investment information: fund companies, banks, insurers, corporate executives and accountants.
The survey polled investors in 401(k)s or other retirement plans who have also invested outside their plans in stocks or mutual funds during the past two years. Opinion Research Corp. of Princeton, N.J., which conducted the study, asked investors to rank these various sources on a scale of one to five, with five being the highest score and one the lowest.
Thirty-nine percent of respondents gave banks a score of four or five, and 38% of respondents ranked fund companies with one of these two highest scores. Thirty-seven percent of respondents gave financial planners a score of four or five. In spite of Enron's woes, 34% of respondents gave accounting firms a ranking of four or five.
Stockbrokers and corporate executives received the poorest ratings, with 36% of respondents giving both groups a rating of just one or two. Insurance salespeople received bottom rankings from 51% of respondents.
TowersGroup President Alan Towers believes fund companies received the highest survey scores for two reasons. "First, the fund industry has not had a major scandal. Second, the media long ago embraced mutual funds as the investment solution for small investors," he said. "The amount of press mutual funds receive could almost be construed as an endorsement. With poor fund performance in the last year, investors have been hurt, but that has not been perceived or presented as the funds' fault. It's just a down market."
Confidence in the Market
The study also explored investors' confidence in the stock market post-Enron, and it appears to be suffering. Forty-three percent of respondents said they now have less confidence in the stock market in the aftermath of Enron. Only 23% percent said they believe strongly in the stock market's ability to reflect the fair value of stocks
Towers said the study provides insight into the reputation of various types of financial institutions. "When you are selling an intangible, particularly a financial services product, reputation is one of the most powerful issues consumers consider, right after performance," Towers said. "However, it's remarkable how reputation really isn't dealt with in any kind of strategic way."
Towers sees compensation as the main reason for the divide in reputation between financial planners and stockbrokers. He also warned that just as the public negatively perceives stockbrokers as being driven by commission, investors could be turned off by the fund industry's increasing concentration on profits.
"Financial planners are seen as more trustworthy because, in most cases, they work for a fee rather than a commission and their business is based on a relationship model. Stockbrokers, on the other hand, have a tradition of commission-based compensation and operate on a transactional model," Towers said. "Brokers are perceived as putting their own interests ahead of the customer's interests."
Towers said his study also confirms his long-held theory on how a firm should build its reputation. "It's not public relations, advertising or branding, but business practices that matter. It's amazing to me that financial services companies don't realize that if you want to change your reputation, it's not as simple as spending $60 million on advertising. You have to change business processes," he said.
Towers said there is a lesson for mutual fund companies in this survey. "Fund companies, in my view, have come dangerously close to putting themselves in the same position as brokers - that is, caring about their profits ahead of their investors. The fact that they are still trusted is a remarkable advantage," he said.
"With credibility issues now at the forefront of investors' thinking, the mutual fund industry has a unique opportunity to show leadership," he said. "To date, the space of advocating for the individual investor has been dominated by Vanguard. Again, the public perception of Vanguard is not different because they spend a lot of money on advertising - it's because their business model is different."