In his recent article “Canada’s trouble with investment advisers,” Tim Kiladze implies that investment advisers have victimized their clients by charging excessive commissions and that this behaviour is only now under scrutiny by regulators. According to the story, the regulators are on the verge of cracking down on this activity.
This analysis ignores dramatic changes in the wealth management business arising from innovation and client demand – changes that are helping to ensure clients receive better service at a better price than ever. The reality is that, while reform has accelerated in recent years, a comprehensive rule framework and vigorous supervisory oversight from the Investment Industry Regulatory Organization of Canada (IIROC) have always been in place.
In recent years, financial products have shifted from commission-based accounts to fee-based advisory and discretionary managed accounts, and from commission-based mutual funds to cost-effective exchange-traded funds. Many clients have opened popular discount brokerage accounts for “do it yourself” investing, complementing advice-based accounts, markedly reducing reliance on commission-based products.
In the past 15 years, IIROC-registered investment advisers have rapidly expanded their offering of fee-based accounts and products to compete with traditional commission-based advisory accounts and mutual funds. These popular alternatives have forced downward pressure on traditional rates. Average commission rates (that is, average commissions per trade) in the industry have fallen almost 30 per cent in the past five years. How many other client-serving industries can say the same?
The steady reduction in the volume of commission-based brokerage accounts and downward pressure on average commission rates increases the risk of excessive trading, or churning, in advisory accounts as the only option to boost commission revenue. However, excessive trading is a contravention of the rules and is under close scrutiny by dealer firms and by regulators. There is no evidence of the widespread practice of excessive trading to ramp up commission revenue.
Mr. Kiladze has noted that advisers are paid a defined payout of retail revenue earned on all types of investment accounts, and the interest spread on client cash holdings. While this is true, the payout scheme does not provide an incentive to maximize commission earnings, but rather an incentive to open and expand discretionary and fee-based accounts, as well as offer trade ideas for brokerage accounts.
Investment advisers have found the most effective way to increase revenue is to build their business through client referrals. Industry surveys indicate that referrals are most likely when advisers build strong personal relationships with their clients, by providing a holistic financial service that embraces a wide range of products to meet specialized needs.
The vast majority of advisers perform a valuable service for their clients, a fact borne out by many client surveys. Investors would be better served if industry participants took more time to better understand the constant flow of new financial products and services, and how advisers respond to them to meet the changing demands of their clients, before challenging how investment advisers behave.