A sea of change

For more than two decades, I have worked with a select group of clients to help them achieve their financial goals in the most efficient manner possible. I have built my business based on a solid value proposition and service offering. I have applied a transparent compensation structure so clients can understand that I have worked to remove any conflicts of interest — real or perceived — to ensure there is no incentive to do anything but offer the best advice possible.

In my opinion, this is the best model, both for clients and advisers. I work this way because it is the right thing to do.

Meanwhile, many other advisers in the industry have clung to transactional and commission-based models often loaded with potential conflicts. Worse yet, some advisers remain focused on selling products or facilitating trades rather than giving fee-based advice. As a result, the industry’s rate of change has been glacially slow.

According to a 2013 study by Cogent Research LLC, asset-based fees currently account for only 59 per cent of total advisory industry compensation — and are projected to reach two-thirds of industry-wide compensation by 2015. If the forecast proves accurate, a large portion of compensation would still be tied to commissions and other transaction charges.

The United Kingdom, Australia, the Netherlands, and the United States have all recently implemented or proposed regulatory reforms aimed at removing conflicts of interest and making the market for investment advice less confusing and opaque. Canadian regulators were late to the party but wasted no time once they arrived.

Requirements for improving and increasing disclosure are being phased in, while proposals for a statutory best interest standard and even an outright ban on so-called “embedded compensation” have been put forward for discussion.

The discussion in the media and at meetings held by the Canadian Securities Administrators has been extensive. The proposals are considered controversial by some industry participants. This is unfortunate when you consider that such reforms seek to create a more efficient market for financial advice. Improving transparency and eliminating information asymmetries are fundamental to establishing a level, competitive playing field so the free market can thrive. These are hardly contentious goals!

Resisting reform

Despite the obvious need to address these deficiencies, there has been some backlash within the industry. One dubious argument against a proposed ban on commissions and trailer fees is that the current model offers access to financial advice to those clients with smaller portfolios who would not want to pay a separate bill for advice. This argument is nonsense. Disclose all the fees associated with investing and advice, and let the clients choose for themselves.

As Rob Carrick of The Globe and Mail so bluntly put it in his article “More Transparency on Fund Fees? Bring It on”: “Net result: People are better able to compare the fees they’re paying and the value of advice received, if any. Do-nothing advisors and sales hacks could find themselves with fewer clients and ultimately have to leave the business. More transparency and fewer useless advisors. Talk about a win-win situation.”

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