I recently participated in a roundtable discussion hosted by the Ontario Securities Commission (OSC). The purpose was to delve more deeply into the industry's response to regulators' proposal to eliminate commissions embedded in investment products.
I sat on the last of the day's three panels. Nine of the day's 13 panelists were firmly in the pro-industry camp - opposed to eliminating embedded commissions. The OSC seemed to be looking for new ideas to address the conflicts of interest caused by the status quo, but heard only old arguments.
While I sat calmly waiting for my turn on stage, I felt like pulling out what little hair remains on my head as I listened to industry's misleading or misguided arguments.
One panelist remarked that clients have not been harmed but have captured a lot of the equity market returns thanks to the accessibility of mutual funds. I would have found this to be a strong point if I hadn't spent years examining this very issue with real data. I highlighted in this blog post that investors in Canadian mutual funds actually missed out on all of the equity return premium (i.e. the potential benefit of taking the risk of investing in stocks) over a nearly 15-year period that ended prior to the worst of the last bear market. That argument doesn't stand up to the data I have reviewed.
Another highlighted that he services 500 clients. That reminded me of an article from last fall showing that many investors may technically be on the books as a client of an adviser, but they're not really getting the advice they want or need.
This same adviser-panelist said his clients like "not writing cheques" for his advice. Another speaker said that without commissions they will have to start "debiting bank accounts" to pay fees, implying that clients won't be happy.
These arguments ignore two important points.
First, clients don't like deceit.
Over the past two decades, I have shown countless clients what they're paying in fees and they've always appreciated the transparency. Clients trust advisers that are similarly transparent.
Second, in a world without commissions, clients will not write a cheque to pay for advice. Rather, such fees will be paid by debiting each client's investment account cash balance monthly or quarterly. The firms making this argument already charge some fees in this manner, so their arguments are puzzling.
One panelist defended the deferred sales charge (DSC); claiming that it encouraged good investor behaviour. Since investors face exit fees to liquidate a DSC fund in the first 6 or so years – his argument went – investors were less likely to panic-sell. But to the claim that the DSC was too restrictive, this same entertaining panelist noted that investors are free to switch out of their original fund and into anything else offered by the same fund company.
This, dear readers, is what is known as talking out of both sides of one's mouth. While this panelist was indeed entertaining; he also used "alternative facts" to support the status quo.
Speaking of turf-protecting arguments; another panelist argued that an industry without embedded commissions will make it impossible for new young advisors to build a practice. The implication seems to be that even if commissions skew advice, we should keep them so that it's not so hard for new entrants.
Don't forget our clients
The problem with most of the industry's responses is the focus on the industry and why a commission ban is bad for industry. And it's exactly why the industry now finds itself in this tenuous position. Rules and regulations are being forced-fed because the industry lost focus on its most important asset – its clients.
(See my May 2016 Investment Executive article for more on this issue.)
I stated to delegates that the industry has the wrong perspective. Instead of a long list of reasons why this regulation won't work and why that rule is too costly; the industry needs to refocus on its clients. Rather than focusing on why something can't be done; the industry needs to be honest about what clients need and deserve. And then concentrate on delivering that in a way that works for the industry. Working from this perspective has worked for me throughout my career – and it's how we've built and evolved HighView. There's no reason that it can't work for the broader industry. That is if it truly wants to work on clients' behalf.
Our clients are the ones placing enormous trust in us and taking investment risk. We owe it to them to give them the best advice we can; to put their interests first; and to figure out a way to give them the information and treatment they want and deserve.
Dan Hallett, CFA, CFP, is a principal with Oakville, Ont.-based HighView Financial Group.