The Canadian financial services industry should take a cue from the land Down Under.

In Australia, some of the industry’s large financial planning firms are shifting their businesses from commission-based to fee-for-service compensation. The rationale is to gain credibility with clients, put a value on good advice and stave off criticism by that country’s regulator. (The regulator’s research found that conflicts of interest lead to clients receiving bad advice).

For Canadian investors, the same situations exist. Both the Stromberg reports and the fair-dealing model research discovered problems with the present system: namely, that advice can be biased by advisors’ compensation so that advisors don’t always act in investors’ best interests; and, even when compensation is disclosed, it’s often not properly understood by investors. Yet the regulators here have turned their backs on the issue and declined to address these disturbing market failures.

The one effort regulators have made to target compensation-related biases focuses only on mutual funds, which solves one problem but creates another — an uneven playing field between products. Some advisors have abandoned mutual funds in favour of segregated funds. Others have taken up the opportunity to refer clients to firms pitching alternative products.

Regulators around the world repeatedly have found that compensation skews advice, but none has found a satisfactory way to protect investors. There’s almost no risk that complacent Canadian regulators are going to be the ones to crack that nut.

Why should the industry bother? Because, in the long run, it would be better off. Debacles, such as the one surrounding the sale of product of Toronto-based Portus Alternative Asset Management Inc., could be avoided if products are recommended solely on their merits. More important, the market for financial advice could function properly if clients paid for it directly.

Although the present system works well for lousy advisors, it is baffling that good advisors should subsidize them through products that pay fixed, embedded compensation. In a free market, good advisors should be able to charge more for their services based on their merits, and poor ones would be stuck getting less. Instead, the industry clings to an oddly Communist approach to compensation.

For the sake of its future health, the Canadian industry should follow the Aussies, and seek to snuff out its conflicts.