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New research shows that fiduciary standards lead to investors buying lower-fee, higher-return products.

Fiduciary Duty and the Market for Financial Advice, a working paper by three academics from Illinois-based Northwestern University’s economics department and the University of Chicago Law School, was published by the U.S. National Bureau of Economic Research in May. The paper examines real transaction data provided by a large, unnamed firm in the U.S. annuities market to see how the presence of fiduciary standards affects the quality of advice given, the products investors purchase and the market for advice.

The research focused on annuities, which have complicated fee structures. The data cover every transaction in the firm’s products from 2008 to 2015, and include details on the products sold, the financial advisor who handled the sale and some information about the clients.

The researchers sought to isolate the impact of a fiduciary duty by comparing data from states in which courts have ruled that broker-dealers are fiduciaries with data from states in which broker-dealers are subject to ordinary industry conduct standards (i.e., a suitability standard).

The study found that the existence of tougher standards affected the advice clients received and generally led to investors being sold products that were more appropriate.

“We find that imposing fiduciary duty on broker-dealers shifts the set of products they sell to consumers away from variable annuities and toward fixed, indexed annuities,” the paper states.

Within the variable annuities market, “fiduciary duty induces a shift toward lower-fee, higher-return annuities with a wider array of investment options.”

The research also found that tougher conduct standards resulted in firms exiting the business. Critics of higher standards typically argue that tougher rules will cause a reduction in the number of firms and advisors serving the market, which could result in the loss of access to advice for some investors.

However, the researchers state, the departure of firms that want to avoid more stringent conduct standards won’t necessarily lead to a reduction in the supply of financial services.

In fact, the researchers found, the presence of a fiduciary duty on broker-dealers was associated with a 16% reduction in the number of firms operating in the market, with no impact on the number of investment advisory firms, which are already subject to a fiduciary duty.

Yet, the volume of products being sold in the market remained essentially unchanged – in terms of both the volume of products sold and the total dollar value of those sales – despite the difference in the dealer population.

“This final result lends credence to the position that extending fiduciary duty to broker-dealers at the federal level would be beneficial to consumers, by leading to increases in the quality of advice,” the paper concludes.

The idea of ramping up industry conduct standards to bolster investor protection has been a subject of debate over the past couple of years in both Canada and the U.S.

Investor advocates generally favour tougher standards, arguing that they would ensure investors get advice that is explicitly in their own best interests.

Many in the industry, meanwhile, claim that higher standards will increase compliance costs without improving investors’ outcomes, and would leave even more investors without access to advice.

Last year, the Canadian Securities Administrators came out against the adoption of a statutory fiduciary duty, deciding instead to pursue their proposed client-focused reforms – which would embed the principle that firms must act in clients’ best interests in a variety of existing rules.

Regulators have indicated that they intend to issue a revised version in the coming year.