It’s well past time for reforms

Although much research exists around the world as to the adverse impact of sales commissions on salespeople’s recommendations, Canada’s mutual fund industry insisted that new research be conducted specifically for Canada. The Cummings report adds to a mountain of evidence confirming that mutual fund sales commissions tilt advisor recommendations, which is not exactly a shocker.

Now that that research has concluded, the industry feels that even more research is required and that we should wait for the results of expected positive impacts of second phase of the client relationship model (CRM2) before acting. The stalling tactics are very obvious; it’s time to move on. It took more than a decade to get a mutual fund prospectus sent to investors before they make a purchase decision. It finally happened, but only after tremendous industry opposition, which is now being claimed as a positive move resulting from industry initiative.

The same thing is happening now with commissions. It’s been almost 20 years since the Stromberg report and more than 10 years since the fair-dealing model were published, with so little progress achieved. Over time, the industry has changed from portraying itself as a transaction business to a trusted advisory business, but it wants to retain all the outdated controversial business models. The old industry is a “dead man walking.”

We will continue to hear of the “advice gap,” even though we know that there are viable alternatives such as firms that do not utilize embedded trailer commissions, robo-advisors or money coaches. Access to other financial advice givers, such as debt counsellors, tax preparers and lawyers, are unaffected by changes to the commissions structure. Still, government policy planning should have provisions that enable affordable trusted investment advice to be available for those who need it.

Mathematically, of course, there should be no change and no advice gap whether a fee is levied or a trailing commission is embedded. Change isn’t easy especially when it’s disruptive, but the time for reform has come. Regulators should provide a reasonable transition period to ensure an orderly conversion to creative business models for unbiased advice giving.

In a December 2015 report to the U.K.’s Financial Services Authority, the U.K.’s Financial Services Consumer Panel (FSCP) reported that it has not seen any evidence to show the existence of a gap in the supply of professional advice.

The FSCP report also stated that “consumers do not always seek professional advice, even when they could benefit from it: some are not aware of what is available; they do not want to pay for advice because they do not understand the price or value of it; they cannot afford it; or they prefer to take decisions themselves. The industry needs to be more transparent. People want to know exactly what they are paying for and what they are getting for it.”

That is exactly what Gross says is needed. Gross does not say that advice shouldn’t be paid for; rather, he is only saying that the investment advice investors receive should be independent of the product advisors sell; the services provided clearly stated; and the investment advice provided be unbiased of sales incentives.

The status quo will clearly lead to continued deterioration of Canadian investor returns and adversely impact retirement income security. Of course, the real reform needed is not limited to the prohibition of embedded mutual fund sales commissions. The real issue is the introduction of a best interests duty for advice providers and increased advisor proficiency/professionalism. Best interests rules protect investors from advisor malfeasance while suitability rules protect brokers from investor lawsuits.

It’s well past time for reforms. As Gross says, the evidence is there.

Ken Kivenko
President
Kenmar Associates
Toronto