For the past year, the wealth industry trade media has been awash in articles, videos and conferences about the sea change that is CRM2, short for Client Relationship Model.
The industry-wide regulatory amendment is intended to improve the fee and performance information available to investors so they can better evaluate the relationship with their advisers and how they are moving towards achieving investment goals.
Clearly, the need to redesign investment statements so they clearly report performance and all fees is a gargantuan effort for IT departments at investment firms across the country;
However, evidence from the field of behavioural economics makes it pretty clear that the effect on individual advisers is likely to be minimal.
Think for a moment about energy efficiency. Most people know that upgrading things like their furnace or investing in LED lightbulbs will save them money. Utilities, governments, schools and media have spent millions making us aware of this. And still, very few people take action to capture this opportunity. To take a more extreme example, does any overweight smoker not know that they are threatening their health and longevity with their poor lifestyle choices? The persistence of the energy efficiency and health improvement challenges in our society offer valuable insight into why greater transparency on investment fees will have little impact on consumer behaviour.
Evidence from behavioural economics actually suggests that human beings may even have a preference for embedded fees. Take the incredible success of rental water heaters in Ontario. Most people know they are paying more to rent the tank than to own it; however, they like having the capital cost and service amortized into a monthly fee that is low enough to get buried in their gas bill. Until a few years ago when new entrants started offering a competitive service with aggressive door-to-door sales, the attrition rate on rental water heaters was less than 1 per cent.
Looking at an investment industry example, Invesco did a study that showed videos explaining fund fees to clients. It wanted to see what people understood about how fees work. Only half were aware that there were different methods of compensation and payment. However, after the fees were explained, 80 per cent wanted to continue to pay for advice through the cost of their fund.
If you’re skeptical about any study done by a mutual fund company, there’s lots of anecdotal evidence to reinforce their findings. My daily Google alert on “mutual fund fees” yields at least two articles every day on this subject. Rob Carrick and Ellen Roseman’s columns about mutual funds vs. ETFs alone have provided more than enough clarity about mutual fund fees and trailers to alert anyone who’s interested to challenge their adviser on this issue. Think about your monthly credit card statement. Do you know anyone who stopped carrying a balance when they started carrying that declaration that it will take you 500 years to pay it off if you only make your minimum payment?
To be clear, I’m not advocating for the status quo of the retail wealth management industry. As a Chartered Financial Analyst I know that the vast majority of funds and advisers underperform the market, so most of us are paying too much for sub-par performance. Experts know that the most efficient way to invest is to hold a simple portfolio of ETFs and rebalance to an age-appropriate asset mix annually throughout your life. However, I run a busy consulting practice and I can always find something more enjoyable to do than select those ETFs (let alone download, fill out and fax the form that is needed to set up a monthly RSP withdrawal). While I know that failing to do so will have an impact on my long-term prosperity, putting it off until tomorrow doesn’t hurt me at all. Good advisers play an invaluable role in drawing our attention to these things.
Rather than focusing on trailer fee disclosure, we should ensure advisers are spending enough time making their clients aware of how much they need for retirement and are putting something – anything – away to prepare for it. The investing public would benefit most from the creation of a new type of advisory firm that used humour, simple language and carefully designed nudges that would increase engagement. Perhaps then people might start to prioritize time with their adviser over their personal trainer.
Amelia Young is the founder of Upside Consulting Group Inc., a management consulting firm specializing in growth strategy for firms that sell complex services.