The in­dus­try needs a more pro­fes­sional com­pen­sa­tion model.

Investment Executive - - FRONT PAGE -

The lat­est round in the em­bed­ded com­pen­sa­tion de­bate is over. Now, it’s time for reg­u­la­tors to push the in­vest­ment in­dus­try to­ward a more pro­fes­sional com­pen­sa­tion model. Tra­di­tional fund in­dus­try play­ers can hardly be blamed for hang­ing on to ex­ist­ing in­dus­try fee struc­tures. They have proven highly lu­cra­tive, and there’s no doubt that such a fun­da­men­tal change will be dis­rup­tive. Yet, while the com­mer­cial jus­ti­fi­ca­tion for re­tain­ing the em­bed­ded com­pen­sa­tion model may be ev­i­dent, there is sim­ply no ba­sis for it.

In­de­pen­dent aca­demic re­search has con­firmed long-stand­ing in­tu­ition that pre­vail­ing in­dus­try fee struc­tures dis­tort mar­kets and harm in­vestors’ re­turns. The ex­ist­ing model rep­re­sents the sin­gle big­gest ob­sta­cle to es­tab­lish­ing the value of fi­nan­cial ad­vice. As long as the in­dus­try con­tin­ues to hide the costs of ser­vice and ad­vice, it cre­ates the mis­taken im­pres­sion among its clients that ad­vice is free. In­deed, ac­cord­ing to the Fed­er­a­tion of Mu­tual Fund Deal­ers’ sub­mis­sion to the Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors, re­search con­ducted for the FMFD found that 70% of the in­vestors sur­veyed be­lieve that they don’t pay their ad­vi­sor.

But claims that switch­ing to an up­front com­pen­sa­tion model will cre­ate a sig­nif­i­cant “ad­vice gap” for lower-value clients are wor­ry­ing. Among other is­sues, the con­tention that the in­dus­try won’t be able to ser­vice smaller clients un­der a di­rect pay ar­range­ment im­plies that the in­dus­try does so now by us­ing the fees charged to wealth­ier clients to sub­si­dize ser­vices to less af­flu­ent cus­tomers. This pe­cu­liar form of stock mar­ket so­cial­ism is nei­ther fair nor jus­ti­fied. And fi­nally, wor­ries re­gard­ing an ad­vice gap un­der­es­ti­mate the in­dus­try’s abil­ity to adapt.

De­spite the fact that the em­bed­ded com­pen­sa­tion sys­tem un­der­mines the value of ad­vice and can harm in­vestors, it’s not likely to change without reg­u­la­tory ac­tion. While the in­dus­try as a whole should ben­e­fit in the long run from a move to­ward both a freer mar­ket for fi­nan­cial ad­vice and greater pro­fes­sion­al­ism, con­cerns about any short-term dis­rup­tion will in­evitably thwart vol­un­tary ac­tion. Do­ing the right thing for in­vestors is up to reg­u­la­tors and, ul­ti­mately, the in­dus­try.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.