RE: The case for banning embedded fees, Investment Executive, editorial, April 2016
How can we reduce conflicts of interest and increase transparency while maintaining access to professional financial advice? For me, the answer is clear. For several years, Advocis has maintained that the best way to protect consumers is not through the elimination of embedded compensation, but through enhanced fee disclosure and higher standards for financial advisors.
And this is not just a position that Advocis holds. New academic research from the University of Calgary’s School of Public Policy released on April 1 concludes that banning commissions will restrict access to financial advice for those who need it most. The paper’s author, Pierre Lortie, stresses that many clients are unwilling to pay upfront for unknown results.
“Regulation should encourage choice. Canadian investors should have access to a wide range of competing products and financial intermediaries, regardless of whether advice is delivered using commission- or fee-based advice models,” Lortie writes in A Major Setback For Retirement Savings: Changing How Financial Advisors Are Compensated Could Hurt Less-Than-Wealth Investors Most.
According to Advocis research, which was carried out by PMG Intelligence, only 4% of Canadian investors currently working with a financial advisor responded that they would prefer to pay an hourly fee for advice going forward. For those with under $100,000 in investment holdings (not including real estate), 59% would prefer to pay an ongoing fixed commission of the value of the product. This tells me that investors do not want their pay structure disrupted. In fact, 88% responded that they believed removing their choice in how they pay for advice would have a negative impact on their investments.
Canadians should be able to choose for themselves which fee structure works best for their individual circumstances. They should also be able to trust that the advice they are receiving is fair and in their best interest.
Lortie’s report emphasizes the need for a stronger emphasis on standards, continuing education programs and other means to improve the competencies and proficiency of financial advisers and increase professionalism. I wholeheartedly agree with this approach.
Consider this: the majority of Canadian adults are without a will. Why? Because they do not want to pay the fee necessary to protect themselves. Either they believe it’s too expensive or that they simply don’t need one. If we ban commissions, we will see fewer and fewer Canadians seeking professional financial advice. The upfront cost will not justify the long-term benefits and will significantly increase the number of Canadians who currently do not seek advice.
President and CEO
Advocis, The Financial Advisors Association of Canada
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