The dream of creating a standard of transparent, client-focused service in the investment industry died Thursday.
Regulators bailed on two reforms that would have made a huge difference for both investors and an investment industry that refuses to change a business model in which too many bad actors are allowed to prosper.
Instead, it was replaced with a scattering of proposals from a group of provincial securities regulators. Sure, they will certainly help some investors. Notably, advisers would be required to recommend investments to clients that are suitable in terms of cost as well as other factors such as risk.
But overall it’s a missed opportunity. Regulators had been looking at whether to eliminate the practice of advisers being paid for their services through commissions embedded in the fees charged to investors holding mutual funds. The right move would have been to ban these commissions and require advisers to charge clients directly for advice, as professionals such as accountants and lawyers do.
The Canadian Securities Administrators announced that embedded commissions will be banned only for online brokerage firms selling mutual funds. That’s appropriate – online brokers offer no advice and thus deserve no commissions. But in investor empowerment, this is a peripheral issue at best.
Regulators also torched any hope that investors will be protected by a requirement that advisers operate under a “best interest” standard, which was the preferred way of saying a fiduciary duty to put clients first. Ontario and New Brunswick alone had shown a commitment to a best-interest standard. Now, all provinces are onside with rules that avoid an overarching best-interest rule.
Embedded commissions have been eliminated in Britain and Australia, but it always seemed a long shot for Canada’s powerful investment industry to be corralled the same way.
The industry’s primary concerns when confronting regulators are its profits and liabilities, said John De Goey, who somehow combines being both an adviser and his industry’s most ferocious critic. “Embedded commissions are mostly about profit, and best interest is mostly about liability,” he said. “The industry will fight tooth and nail to defend both.”
Oh, to have your sports team win the big games like the investment industry does. It’s left for regulators and, in turn, investors, to look for small victories, of which there were a few in the CSA proposals.
Wanda Morris, vice-president of advocacy for CARP (formerly known as the Canadian Association for Retired Persons), praised the proposal to widen the concept of investment suitability to include cost. She says this will address conflicts where advisers recommend particular investments (sometimes in-house products) because they pay the best commissions and not because they are best for clients.
“These rules have the potential to be a real game changer to protect investors, particularly around high fees,” she said. “If the proposals go through, I think we’ll see significant progress.”
The new rules would also serve investors by requiring disclosure of what firms charge, whether there are minimum account sizes and what products and services are offered. One further noteworthy measure would eliminate the odious deferred sales charge (DSC) option for purchasing mutual funds.
DSC funds offer the benefit of no upfront sales commission, but investors must pay a redemption fee if they sell their holdings within six or seven years of purchase. Advisers get a big upfront payment from fund companies when they sell these funds while investors get shackled to funds they might want to sell for perfectly legitimate reasons.
Even the mutual-fund industry has shied away from DSCs. A rough estimate of DSC fund assets from the analysis firm Strategic Insight put them at 13 per cent of the total last year, down from 26 per cent in 2012. Mr. De Goey said killing the DSC option outright for advisers would “get some of the riff-raff off the street.”
Advisers themselves may be the biggest losers from the regulators’ loss of nerve about proceeding with the elimination of embedded commissions and a best-interest standards. Both of these changes would have freshened and modernized an industry that, despite many good people, can sometimes look patronizing, evasive and predatory.
It was a dream to think the industry would get out of its own way and allow something to be done about this.