In the investing industry, the line between what’s best for the client and what’s good for the adviser is easily blurred.
Advisers want their clients to enjoy high returns, but they need to make money, and the potential for large rewards is tempting.
That creates an inherent conflict of interest in many client-adviser relationships, critics say, and too many investors are left in the dark about the fees they’re paying to advisers and the effect those fees have on returns.
Many investors assume financial advisers have a duty to act in their best interests. But that’s not the standard regulators currently demand. The requirement in Ontario, for example, is to act “fairly, honestly and in good faith” – the duty-of-care model. That’s a long way from explicitly mandating that financial advisers’ first obligation is to the client – a so-called fiduciary duty – such as exists for lawyers, accountants and portfolio managers.
Canadian regulators are examining steps that would follow the lead of Britain and Australia, both of which are pushing ahead with legislation to regulate adviser fees and clarify the duty of advisers to serve their clients. The Ontario Securities Commission, under new chairman Howard Wetston, has pledged to build “confidence in the investment process” by exploring the pros and cons of mandating a fiduciary duty. The commission is expected to release a discussion paper on the issue this spring.
“The adviser-client relationship … is an area of focus for the Commission because of its importance to retail investors,” said OSC spokeswoman Carolyn Shaw-Rimmington.
Critics say changes are needed in part because there’s a side to the investment business many Canadians don’t see.
Take the so-called cash payout grid, industry parlance for the mechanism that determines the pay of many brokers. The more investments they sell, the greater the share of the fees they get to keep – sometimes in excess of 50 per cent.
Fail to meet minimum revenue targets at the bottom of the grid and a young broker can soon be looking for a new career.
“The grid is the enemy of savings,” says Donald Ross, a former Vancouver-based mutual fund wholesaler for a major bank-owned investment dealer. “It creates an incredible amount of pressure to generate volume.”
Throw volatile equity markets and near-zero interest rates into the mix and what your broker earns can be the difference between you making money or owning a shrinking nest egg.
John Tak, 57, of Vancouver, and his wife say they’ve endured a decade of frustration over embedded fees and subpar returns. They’re now on their third financial adviser.
“I can’t think of another field where you don’t get a clear bill and you don’t know exactly what you’re paying for,” said Mr. Tak, an executive at a health products manufacturer. “I don’t think they’re dishonest or trying to trick me. It’s the nature of the industry.”
The standard risk profile that clients sign becomes a way for advisers to duck their responsibility to generate better returns for investors, Mr. Tak said. “They’re making money, whether we’re losing money or making money,” he complained.
A nationwide survey by Genesis Public Opinion Research for The Globe and Mail found that most Canadians generally trust their financial advisers (52 per cent gave their advisers marks of 9 or 10 on a 0-10 scale).
But they’re also deeply dissatisfied with the returns they’re getting, disillusioned with the stock market in general and wary of their own investment ability. And less than half of respondents give their brokers top marks on such critical measures as recommending investments that suit their financial goals and selling products clients fully understand.
The data suggest many investors don’t have the necessary tools to assess the quality of the advice they’re getting.
“Many retail investors don’t know any better,” said Genesis pollster Dave Crapper.
Experts say too many Canadians don’t understand what’s behind the investment advice they’re getting, and more importantly, how much they’re paying for it. In many cases, the financial advice investors get is coloured by the adviser’s needs, including a desire to keep their job. Buying, selling and just holding on to mutual funds, many with high fees, for example, is a common way for advisers to earn a living.
“A lot of people don’t understand what they’re paying for. They think the advice is free,” said Ilana Singer, deputy director of the Canadian Foundation for the Advancement of Investor Rights.
“Their own knowledge is so low they don’t know how to assess the value of the advice they’re getting … If you think you’re getting free advice, your opinion of that advice will be higher.” Ms. Singer said many investors are unaware that the cost of the advice they’re getting is often buried in the mutual funds they’re buying, through trailer fees and management expense ratios.