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As Canadian regulators prepare this month to unveil proposed changes towards the way financial advisers deal with clients, a new paper is warning that altering the way advisers are compensated could worsen the retirement picture for many Canadians.
Unbundling fees from investment products, an idea being studied by provincial regulators across Canada in the form of a potential ban on embedded fund fees, has created an advice “gap” in jurisdictions like the United Kingdom and Australia where it has been adopted, says the paper released Friday by the School of Public Policy in the University of Calgary.
Author Pierre Lortie says studies have also shown that investors who receive professional advice save more, and accumulate more wealth compared to those concentrating on the same socio-economic characteristics who don’t receive professional advice.
As a result, Lortie says, “any reform that causes investors to split up from their advisers, in order to never hire one, would be counterproductive to the public policy goals of helping Canadians better get ready for retirement.”
His paper acknowledges the goal of mitigating conflicts of great interest between an adviser and client that can exist when embedded fees in certain funds compensate the adviser more richly than the others that might be within the client’s best interest.
But the paper argues there are better ways to get rid of potential conflicts, for example improving the proficiency and professionalism of financial advisers. These techniques, Lortie says, could be preferable to changes in compensation practices that may threaten the retirement security of numerous Canadians.
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“One thing arguably more problematic than clients receiving potentially conflicted advice is clients lacking access to any advice whatsoever,” Lortie says in the paper. “And in line with the experience of other jurisdictions which have ordered fees to be unbundled and instead be structured as upfront fees, that’s the result that ends up occurring for investors below a particular income level.”
The number of financial advisers in the U.K. fell to 31,000 from 40,000 after fees were unbundled from investment products this year and major banks cancelled their financial advice services for clients with modest assets, according to the paper. The opening of investment accounts worth less than 100,000 pounds fell by half.
Lortie says there is little change to point out that Canadians wouldn’t be left with a similar income-related advice gap if regulators require fees to become unbundled.
“Simply put, many clients are hesitant to pay upfront for unknown results,” he writes.
Any reform that triggers investors to split up from their advisers, in order to never hire one, could be counterproductive towards the public policy goals of helping Canadians better get ready for retirement.
The paper says voluntary personal savings are unlikely to deliver adequate retirement income unless retail investors have access to expert consultancy from competent, well-regulated professional advisers and asset managers on terms that comply with their preferences – whether or not advice is delivered using commission or fee-based advice models.
The Canadian Securities Administrators, an umbrella group for provincial market watchdogs, has dedicated to setting a policy direction in the first half of this season on client-adviser issues, including whether or not to cap or abolish embedded sales and trailing commissions on funds.
An update released through the CSA on Thursday said the regulators will publish proposals inside a consultation paper this month targeted at “strengthening the obligations that advisers, dealers and representatives owe to their clients.”
A timeline for the regulators to address the issue of embedded or bundled fees wasn’t provided in Thursday’s update.
