Can you see yourself going to a grocery store and buying a week's worth of groceries without checking the prices?
The question has to be asked in light of how people buy investments. Somehow, the keen shopping instincts we've developed in an online world of instant information turn to mush when we invest.
If you don't ask about the fees and costs of investing, there's about a 50-50 chance the investment industry won't tell you. This is clear from the results of an exercise in mystery shopping for investment advice that was undertaken by securities regulators. Product fees were discussed in 56 per cent of shopping experiences and compensation for advisers were discussed in 25 per cent.
Would you buy 44 per cent of your week's groceries without paying attention to price? No way. Without a price, you can't gauge value. You also give sellers of any product the latitude to overcharge when you're not a price-aware consumer. That, in a sentence, is the story of Canada's mutual fund industry's success.
The mystery shopping initiative was undertaken last year by the Ontario Securities Commission, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada as part of research being done in advance of decisions on whether to make big changes in the way investment advice is delivered and paid for. There's tremendous resistance to these reforms in the investment industry and regulators are trying to gather evidence before deciding how to proceed.
Changes are necessary – the mystery shopping results are just the latest evidence. Last year, CBC TV's Marketplace conducted a hidden camera investigation that caught advisers offering what was described as inaccurate, misleading and inappropriate advice. In 17 years of writing about personal finance, I've seen many examples of this kind of adviser behaviour. There are superb advisers out there, but they work in an industry that needs to do better as a whole.
Investors themselves have a role to play in this by getting over their reluctance to discuss the cost of investments and advice. Investment people have perfected the art of intimidation, with their macho financial jargon, their panelled offices, and marketing that slobbers over high-net-worth clients and ignores everyday people. But investments and advice are not different than other products you buy. Price matters.
Parts of the investment industry are incorrigible on fees. Next summer, firms and advisers will be required under new laws to start including information on client statements showing the total amount of fees paid. Far-sighted business people would get out in front of this potentially shocking new level of disclosure by ramping up their efforts to explain fees to clients.
The mystery-shopping exercise suggests fees are still not talked about in a significant number of interactions with clients. The actual shoppers were people recruited by a market research firm on the basis that they expressed interest in participating and did not work in the advisory business or for regulators. A total of 88 interactions were carried out to discuss the investment of a lump sum of money, only 16 per cent of which were rated as a negative experience by shoppers.
And yet, a lot of them were treated unprofessionally. The relationship between risk and return was discussed in just 52 per cent of shopping experiences. Investing goals were often covered, but core personal information about a client's investing needs was collected in a minority of cases. It's the weak fee disclosure that really stands out, though. In fact, the No. 1 conclusion of regulators from the mystery-shopping initiative is "it is difficult for investors to comparison shop for financial advice, especially on important aspects such as fees and costs."
Regulators are evaluating two initiatives that would improve the investing experience, one of which would require advisers to put client interests ahead of their own through a "best interest" standard. The other would end the practice of embedding compensation for advisers in the cost of owning mutual funds and other products. Instead, advisers would directly charge clients an advice fee that would be much easier to understand and discuss.
These measures would be a big improvement over the status quo, but they're not enough on their own. Investors have to be a lot bolder in questioning advisers about what they do and how much they charge. Imagine yourself in the grocery store. Would you buy anything that didn't have a price tag on it?