For the past two decades, John De Goey has been a thorn in the side to many in the investment industry for being a staunch proponent of eliminating mutual funds with embedded commissions.
For much of that time, Mr. De Goey, now portfolio manager at Wellington-Altus Private Wealth Inc. in Toronto, has focused the majority of his efforts on persuading fellow financial advisors and the industry’s regulators that it’s in their best interests to abandon this compensation model. Instead, he has long advocated for a wholesale move toward one in which the cost of advice is separate from the cost of the financial product itself.
Now, with his new book, STANDUP to the Financial Services Industry: A Practical Guide For Canadians, Mr. De Goey is sending the message directly to investors because he’s disappointed his “fellow advisors didn’t heed the clarion call [to action] and didn’t do what the evidence shows they should be doing.”
In turn, he’s hoping investors will begin asking their advisors many of the difficult questions he poses in his book. After all, he says, no one more than investors should have a greater motivation to see change because it’s their money that’s at stake.
We met with Mr. De Goey to get his take on recent regulatory initiatives; why he believes advisors should move away from embedded commissions; and his message for advisors who are dedicated proponents of that model.
Last year, the Canadian Securities Administrators (CSA) decided to keep the embedded commissions structure in place with the introduction of the proposed client-focused reforms. What impact do you believe these initiatives will have? And has the ship now sailed for regulatory action on embedded commissions?
The short answers are not much and for the foreseeable future. Many people had high hopes for [the second phase of the client relationship model (CRM2)]. All the studies I’ve seen in terms of awareness of what you’re paying, how much you’re paying and how your advisor is being paid is not appreciably different post-CRM2 than it was pre-CRM2. The problem is, well, why are we being transparent about the cost of advice but not transparent about the cost of the product? That’s because there’s no incentive for advisors to use low-cost products – and the client is paying for both. To disclose one and not the other is almost wilfully misinforming.
As to whether this is going to change anytime soon, given that regulators spent a decade looking at it, I expect it would be another decade before they look at doing anything about embedded compensation again. Regulators should be ashamed of themselves.
Many advisors were trained to sell actively managed mutual funds with embedded commissions at firms that are structured for this model. What opportunities are there for advisors at these firms who may be open to making a change?
There’s an opportunity for a real win-win here. Let me use the new products from Vanguard [Investments Canada Inc.], which are almost a year old now, as an example. These are actively managed mutual funds that are cheap. And yet, most advisors aren’t using them. So, you can use products that are cheaper and better – you might even be able to charge a bit more for the advice component than you would if you were getting a trailing commission – and then pass the massive savings on to your clients. You’re being paid more and the investor is paying less, so he or she is likely to get to retirement sooner. That’s how you protect your practice by being focused on the client.
But what if advisors are at a firm at which they’re really only allowed to sell proprietary products with high embedded commissions?
Then they really have to think about whether they’re at the right firm. I’ve had to switch firms sometimes because they didn’t allow me to do what was right for my clients. And I refuse to compromise that; my clients come first. So, if you’re at a firm that prevents you from doing that, you have to make a choice: Are you going to spend the rest of your career doing something that’s not necessarily best for your clients? Or will you summon the courage to go to a firm that will allow you to actually put your clients first?
The great opportunity of getting rid of embedded compensation is it allows for the introduction of the concept of product meritocracy. You can use better products. Our line of work is probably the only one that I’m aware of in which low-cost products are the best products because you get what you don’t pay for – a penny saved is a penny earned. And you can pay yourself the same or even charge a little bit more as an advisor.
There has been and will continue to be resistance to your message. Many advisors may trust the authority of their firms, their compliance departments and, in effect, the regulators. They will say, well, the fact the CSA hasn’t banned embedded commissions means there’s nothing wrong with them. What’s your message to these advisors?
This is the most difficult part of all. The problem is a lot of advisors are Kool-Aid drinkers. They function in an echo chamber in which they’re not intellectually curious. They don’t challenge the assumptions their businesses are based on; are unwittingly trusting of their firms; and their firms will say things that will cause advisors to think a certain way. In the end, a lot of registrants don’t realize that they’re being played as pawns in a system because they spent their entire lives being pawns in a system. And until advisors can stop, take a step back and look at the bigger picture of what’s going on, that’s likely to persist.
My message to advisors is this is your last chance. When the revolution comes, the longer you resisted, the harder you’re going to fall. For those advisors who think they can skate through this and avoid it, there’s not much doubt that investors are either getting the message or are going to get it. It’s becoming clear that we’re reaching a tipping point. So, you better jump now and get what little is left of a so-called early-mover advantage because there’s going to be a lot of late-mover carnage.
This interview has been edited and condensed.