Never has the need for financial advice been greater. This message, which has been consistently given by industry participants and their trade associations, is often repeated by the media and is usually accompanied by descriptions of complex financial offerings and investment strategies.

Pity the poor investors who try on their own to make sense of what they are reading or try to decide how best to invest their funds to meet their investment objectives within their own risk tolerance.

Regulators have accepted the need to enhance investors’ knowledge and awareness and, for the most part, have recognized the need to be involved in this process. They also understand the importance of full, true and plain disclosure of material information about issuers and their securities being in the marketplace at all times.

But what regulators haven’t accepted is the need to make sure this information is actually delivered to investors. This is a glaring omission. Combined with the myriad conflicts of interest that exist among financial services providers (advisors, dealers and their registered representatives) and investors, this omission is a serious impediment to meeting the regulatory mandate of protecting investors and fostering fair, efficient capital markets in which investors can have confidence.

Nowhere is there so egregious an example of the failure to make meaningful disclosure as the impact of the high cost of investment funds (such as mutual funds and segregated funds) that are offered by financial services providers as long-term investments of choice to investors who are trying to provide for their lifetime needs.

Let me be clear: it’s not the products that are at fault; it’s the high costs entailed within many of them. The impact of these costs on investors makes me question the suitability of these investments for them, and whether the advisors who recommend them to clients are breaching their fiduciary obligations to these clients.

Some advisors have questioned whether high fees and other expenses actually translate into an egregious erosion of an investor’s long-term total return. Many investors seem unaware that the “tyranny of compounding” converts each 1% of fees and charges into approximately a 20% reduction in the long-term total return the investor would otherwise have. If you assume an average expense ratio of 2.5%, this formula reduces the investor’s long-term capital by about 50%. Yet the investor is exposed to market risk.

Given these numbers and the exposure to market risk, it is reasonable to ask whether an investor would not be better off in a default risk-free Canada bond or deposit.

Some financial advisors have attempted to justify directing clients into high-cost investment funds by arguing that the services they provide to clients merit such costs. This argument goes to the value proposition.

It is certainly up to clients — after being fully informed of the impact of the costs on their investments and the added risk they are taking — to decide whether the capital erosion and risk assumption represent a fair exchange for the services. However, this disclosure is not usually made to clients, and the resulting informational asymmetry works to their disadvantage.

Both the industry and the regulators are at fault and should be held accountable for allowing this situation to continue.

Investors need to be able to rely on their financial advisors for sound personalized advice that meets their individual needs. Investors need to know the impact of investment fund fees and charges on their ability to accumulate capital savings, and need to understand what alternatives exist and the relative risks.

It is time to eliminate the payment for third-party advice from the expenses charged to investment funds and return to “first principles” that did not allow distribution costs to be charged to a mutual fund.

Regulators need to ensure that the regulatory system supports these principles.
If these steps are not taken, we may be asking whether mutual funds and their look-alikes should be endangered species. IE