After the financial crisis of 2008-09, governments around the world started looking at ways to make the investment business more ethical and transparent to consumers.
Some countries are changing the compensation system for financial intermediaries. Instead of allowing product providers to pay commissions to product sellers, they want consumers to pay sellers directly for their services.
Embedded commissions are hidden from consumers and represent a conflict of interest that makes financial advice less reliable.
Suppose youâ€™re buying mutual funds and donâ€™t know which ones to choose. Your advisers may urge you to buy funds that pay them better commissions. Stock funds, for example, are more lucrative than bond funds.
Mutual fund sellers may push their own house-brand funds at the expense of other equally good funds. Or they may push you to borrow money to invest, thus increasing the assets they manage and their commissions.
Life insurance sellers also earn commissions from product sellers. They can make more money on cash-value and universal life policies than on term life policies. So, guess which ones they prefer to sell?
The compensation structure for financial advisers is not yet an issue in Canada. But itâ€™s a high-profile trend elsewhere. Britain and Australia are both moving to ban commissions in the next couple of years.
I recently moderated a panel discussion on fees versus commissions, which included British and Australian industry representatives. They both said that financial advice would be more objective if consumers paid for it out of their own pockets. See story here.
What about better disclosure of conflicts? Thatâ€™s the Canadian approach. Right now, securities regulators are planning to make a short document available by law to all mutual fund buyers at the point of sale.
Disclosure doesnâ€™t work, the two foreign reps agreed. People just donâ€™t read the documents theyâ€™re handed and often donâ€™t understand them anyway.
Canada should start talking about fees and commissions, since the issue is not going away. Consumers will want to follow other countriesâ€™ examples.
Financial advisers can’t call themselves professionals and accept payments from product providers — without betraying the trust of clients who rely on them for unbiased advice.
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