Canadian securities regulators are currently going through the process of trying to reform our investment industry practices for the benefit of investors. Specifically they are trying to address fee and performance transparency and are also thinking about implementing a “best interest” standard for financial advisors in Canada. I know, the idea that advisors should work in their clients’ best interest isn’t that crazy but regulators feel that the industry hasn’t been able to self-regulate sufficiently to keep Canadian investors safe. Canada does still continue to have the highest mutual fund fees in the developed world and most Canadians don’t know how or how much their financial advisor gets paid. Other countries have already taken steps to enhance fee transparency and to eliminate practices that are harmful to investors.
There have been a series of protest pieces published in the last couple of years arguing that once investors become aware of the high fees they are paying many will turn away from traditional advisors and as a result do themselves harm. Many advisors will be forced to leave the industry or focus only on higher net worth customers, stranding swaths of those who need advice most with nowhere to turn. While we imagine some instances of this type might occur, on the whole we find this argument a little ridiculous and self-serving. To begin with, the high fee, low transparency “advice” people are getting is probably something they can do without to begin with. Also, competitors will emerge very quickly to fill any gaps. As Rob Carrick of the Globe and Mail points out in “Investment-adviser fee reform: Investors, you’ll be just fine”:
“Already, a new generation of advisers is emerging to serve clients of any wealth level, rich or not, experienced investor or beginner….in the meantime, don’t worry much about losing advisers. We’ll be well rid of the ones who go, a point that many of Canada’s quality advisers will agree with me on.”
A best interest standard is a little trickier. We worry that a best interest standard is likely to be ill crafted and leave investors with false comfort. Early indications from the US are that their own best interest standard being proposed by the Department of Labor might cause a fair amount of confusion. Lack of transparency and education is what is throwing off what should be a natural and productive relationship between investors seeking advice and those offering it. We’d recommend first trying increased transparency and better investor education before imposing best interest standards. Investors already have the choice to work with an advisor who is held to a fiduciary standard or not. They just don’t know it – better informed investors will make better choices on their own.