Financial regulators in Britain, the U.S., Australia and elsewhere are moving toward regulatory frameworks that require financial advisors to become fiduciaries and put their clients’ interests first. Some countries are even banning commissions embedded in financial products because advisors would then be more likely to recommend mutual funds and other products on their own merits rather than by the amount of commissions they pay. Canadian regulators appear to be in no hurry to follow suit on these initiatives.
A case in point is the discussion paper released August 14 by the Investment Industry Regulatory Organization of Canada (IIROC). In “Request for comments on draft guidance regarding compensation structures for retail investment accounts,” the agency says embedded commissions are acceptable as long as they are suitable for the client and there is better disclosure.
Clearly, only incremental changes to the status quo are on the menu. On the plus side, though, greater disclosure should result in investors becoming more aware of the fees paid. “The greatest impact will be on advisors who generate fees for themselves, which should lead to an increase in the proportion of advisors who put their clients first,” says Ermanno Pascutto, executive director of the Canadian Foundation for Advancement of Investor Rights.
“In particular, we like the guidance on eliminating double-charging,” he adds. This means fee-based accounts (which pay for financial advice via an annual fee instead of commissions) would more consistently rebate embedded commissions to fee-based clients instead of funnelling them to advisors.
However, Pascutto would ultimately prefer to see embedded compensation replaced by fees charged directly to the client. “It’s a more straightforward way of doing business. The problem with embedded fees is that many investors don’t see them, so there is little competition among fund providers that could lead to more reasonable rates. In fact, there is the perverse effect of encouraging fund companies to compete for business by paying higher trailers to advisors.”
Investor advocate Andrew Teasdale applauds the IIROC paper`s recommendation to set up administrative processes for ensuring the suitability of compensation structures. One such example is by making sure advisors don`t shunt infrequent traders into fee-based accounts in order to get more revenues out of them. However, he regrets that a bigger issue was left untouched, as he describes in a blog post: “No discussion whatsoever concerning the pros and cons of a move to a commission-free environment. Well, we have been put in our places!”
Ken Kivenko, president of Kenmar Associates, is no fan of commission-based compensation, either. It “works against the provision of proper recommendations … and inherently precludes a fiduciary relationship between a retail investor and his or her advisor,” he notes in Advisor Risk.