Investor protections for investment advice sought

ByABC News
June 11, 2012, 8:48 PM

— -- Consumers seeking investment help are often clueless about the different types of financial services available, experts say. And it's not easy for them to compare advisers and make an informed decision.

Unfortunately, the industry and regulators do little to help consumers, the experts say, sparking a call for industry changes.

Investment advisers, financial planners and broker dealers each have different obligations, but their standards have blurred, says a 2011 study by the Securities and Exchange Commission.

Investors clearly need to be better protected when receiving investment advice, the SEC says.

And the need is increasing as more middle-class Americans, who invest primarily through 401(k) plans, are going to investment advisers for retirement advice. "You're not talking about people with a lot of financial sophistication," says Barbara Roper, director of investor protection for the Consumer Federation of America. "And it is one of most important decisions they will ever make."

When consumers want to select a mutual fund, they can get information, such as Morningstar.com star ratings. "But when you go to an adviser, what do you get?" says John Rekenthaler, vice president of research at Morningstar. "You get promises and stories. Some of them are good and true, but how do you know?'

To help address that issue, a new industry performance standard has been proposed by BrightScope, a provider of independent retirement plan ratings and investment research, and the Spaulding Group, which offers performance measurement products and services.

While some investment advisers provide performance data, they do it in ways that are a little deceptive, says Mike Alfred, CEO and co-founder of BrightScope. The new standard is supposed to give investors a transparent way to compare and contrast performance.

"Imagine a database and you can see advisers' track record, how long they have been doing this and what are the results for a moderate portfolio or a conservative portfolio," says Rekenthaler, a member of the performance standard's advisory board.

The performance standard's advisory board is still working on its basic principles. And it is setting up a non-profit entity so the SEC will review the proposal and provide feedback. "This definitely won't happen overnight," Alfred says. "These kind of standards typically take 10 years."