Caution urged on fee change
Accessibility of financial advice could be reduced
A new research paper is warning that adopting a regime where embedded fees for financial advisers are banned in favour of other compensation methods such as up-front fees could inadvertently end up worsening the retirement picture for many Canadians.
Unbundling fees from investment products, a concept being studied by provincial regulators across Canada in the form of a potential ban on embedded fund fees, has created an advice “gap” in jurisdictions such as the United Kingdom and Australia where it has been adopted, says the paper released Friday by the School of Public Policy at the University of Calgary.
That is because breaking out fees for advice can dissuade people from ever hiring an adviser in the first place.
Author Pierre Lortie says research has also shown that investors who receive professional advice save more, and accumulate more wealth than those with similar socio-economic characteristics who do not receive professional advice.
As a result, Lortie says, “any reform that causes investors to separate from their advisers, or to never hire one, would be counterproductive to the public policy goals of helping Canadians better prepare for retirement.”
His paper acknowledges the goal of mitigating conflicts of interest between an adviser and client that can exist when embedded fees in certain funds compensate the adviser more richly than others that might be in the client’s best interest.
But the paper argues that there are better ways to remove potential conflicts, such as enhancing the proficiency and professionalism of financial advisers. These methods, Lortie says, would be preferable to changes in compensation practices that could threaten the retirement security of many Canadians.
“One thing arguably more problematic than clients receiving potentially conflicted advice is clients not having access to any advice at all,” Lortie says in the paper. “And based on the experience of other jurisdictions that have ordered fees to be unbundled and instead be structured as upfront fees, that is the result that ends up occurring for investors below a certain income level.”
The number of financial advisers in the U.K. fell to 31,000 from 40,000 after fees were unbundled from investment products in 2011 and major banks cancelled their financial advice services for clients with modest assets, according to the paper. The opening of investment accounts worth less than 100,000 pounds fell by half.
Lortie says there is little to suggest that Canadians would not be left with a similar income-related advice gap if regulators require fees to be unbundled.
“Simply put, many clients are unwilling to pay upfront for unknown results,” he writes.
The Canadian Securities Administrators, an umbrella group for provincial market watchdogs, has committed to setting a policy direction in the first half of this year on client-adviser issues, including whether to cap or abolish embedded sales and trailing commissions on funds.
An update released by the CSA on Thursday said the regulators will publish proposals in a consultation paper this month aimed at “strengthening the obligations that advisers, dealers and representatives owe to their clients.”
A timeline for the regulators to address the issue of embedded or bundled fees was not provided in Thursday’s update.