Reaction to the controversial study Mutual Fund Fees Around The World, by Ajay Khorana, Henri Servaes and Peter Tufano, professors respectively at the Georgia Institute of Technology, the London Business School and Harvard Business School, has been fascinating. In fact, it is worthy of a study of its own.

Some people attacked the study’s assumptions. Others attacked the mathematics. Some expressed disbelief in the results and some attacked the people who wrote about the study.

But the most interesting reaction of all came from some fourth-year students in a financial planning course at a Toronto university college. These students are planning on working in the financial services industry and are hoping to earn their certified financial planner designations.

The students were given a copy of the article, “Cost of investing does matter,” which ran in the October 2006 issue of Investment Executiveand focused on the study. They were asked to assume they were financial advisors and the professor was an unhappy client who had read this article and was asking why the advisor was charging more than the rest of world with respect to the mutual funds he or she had recommended — especially as the client’s return was not as good as the index. The professor asked the students how they would respond.

The first reaction was to defend the fees and assert that the advisor’s services were worth every penny. The next reaction was that these fees were set by the company, so this is what the advisor has to charge.

Further prompting resulted in some students saying they would speak to their managers to see if the fees could be lowered. Their enthusiasm for this solution waned when the professor asked whether they realized that by doing so they would be cutting their own compensation. The reaction of the students morphed into: “Well, if this has been the fee structure for so long, why should we change it?”

The professor, who has had a multi-faceted and long career in the financial services industry, used the scenario to highlight the conflict financial advisors often face in taking care of their own interests and those of their clients. He also used it to stress the importance of financial advisors taking into account the impact of fees on the value proposition for clients. This finally turned the discussion to the question of whether clients are getting a fair shake.

The lesson ended with a heightened awareness that there is a lot in the financial services industry that favours fund managers and that once the students join the work force, they will have to face this moral dilemma.

They will have to answer the questions of knowledgeable clients. They have to prepare themselves for the future — not just because of negative articles in the press, but because clients’ needs must come first if advisors are to meet their fiduciary obligations.

It is a lesson that bears constant repetition. And one that financial advisors who best serve their clients’ interests must live by.

It is crucial that education and training programs of those entering the industry emphasize these points, and that product and service offerings meet the needs of clients rather than the needs of financial services providers.

It is essential for the well-being of Canadians and the ongoing viability of the industry that financial services providers review their offerings with the needs of clients in mind. And that they be held accountable if they do not. IE