Securities regulators have their finger on the reset button for the financial advice business.
Will they do the right thing and press it without delay? Not if they buy the argument that reforming the way advisers are paid for selling mutual funds will deprive some people of the financial advice they desperately need.
The term adviser is vague enough to include people who actually earn their fees by providing financial planning and those who take the short cut of just selling mutual funds and other investments. But that could change if regulators follow through on an idea floated late last year to eliminate trailing commissions, an industry term for the adviser compensation that is embedded in mutual fund fees. Instead, advisers would bill clients directly for their services.
Net result: People are better able to compare the fees they're paying and the value of advice received, if any. Do-nothing advisers and sales hacks could find themselves with fewer clients and ultimately have to leave the business.
More transparency and fewer useless advisers. Talk about a win-win situation.
Not everyone sees it that way. In a submission to regulators, Advocis - a group representing more than 11,000 advisers across the country - warns that Canadians badly in need of financial advice may have to go without if fund fees are unbundled.
Advocis reasons that if people are presented with a separate bill for advice, some will balk. They'll walk out on their advisers, who in turn will lose revenue and perhaps decide to get out of the business.
I leave it to Taylor Hewson, a 27-year-old adviser from Regina, to respond to the idea that unbundling commissions will cause an exodus of advisers. "I say, good riddance," Mr. Hewson wrote in an e-mail sent to me and to Advocis. "If you cannot intelligently show your value to the clients you serve once they see their fee or pay you directly, I am sorry; this is not the business for you."
How great is this? A young voice highlights the conscientious, advice-driven side of the advisory business, while also calling out his professional association for its faulty logic in trying to keep the status quo on fees. Isn't Mr. Hewson afraid of a backlash from his peers? "I didn't think I would offend any of my colleagues. The people I know should be in this industry, and they do the right thing."
The advisory business loves to quote studies and surveys showing how people are better off financially when they have an adviser. Yet, it's warning that if required to pay directly for advice, some people will run for their lives.
"We need to be cautious about making any changes in the system that could lead to less advice," Advocis president Greg Pollock said in an interview. "If that happens, it will lead to less financial wealth and less financial health. And if that's the case, people will be dependent [financially] on other sources, and that likely includes the government at a time when governments are stretched."
Mr. Pollock noted the big decline in the number of U.K. advisers following the decision to adopt a commission ban that took effect Jan. 1. Some banks have stopped providing advice altogether and it's estimated that 7,200 people have left the business. The overall decline in adviser numbers has been pegged at 20 per cent.
But an article in a British publication called MoneyMarketing (read it online at http://bit.ly/12S0ERg) suggests there are many additional reasons why the advisory population has declined, including a weak economy, poor quality of advice in some cases, scrutiny by regulators and an increasing number of do-it-yourself investors.
The loss of 20 per cent of advisers here in Canada might be just the thing to help professionalize the advice business. Purge the fake advisers who are only in the business to generate sales commissions and you end up with a committed core of true advice providers. Advocis happens to be an advocate of tougher standards for advisers, which would make a nice complement to fee unbundling.
Another benefit of an adviser exodus is the resulting opportunity for the emergence of alternative models of delivering advice to people who need it. Fee-only advisers - they offer the ultimate in transparency because they charge a flat or hourly fee - might grow beyond their current niche status. We might also finally see someone introduce a viable online advice model that combines personalized attention with low fees.
Mr. Hewson, the young adviser from Regina, says he's fine with any disruptions caused by the unbundling of fund fees. "If this makes it hard to work in this industry, then that's just fine. At the end of the day, consumers are winning."
END OF THE TRAIL?
Regulators have floated the idea of eliminating trailing commissions, a term for adviser compensation
embedded in mutual funds fees. Here's how trailers work:
Fund or bond: $60,000 in mainstream equity mutual funds
Average fund fee: 2.25%
Typical trailer embedded in that fund fee: 1.00%
Dollar value paid to your adviser and his or her firm: $600
Fund or bond:$40,000 in bond funds
Average fund fee: 1.00%
Typical trailer embedded in that fund fee: 0.50%
Dollar value paid to your adviser and his or her firm: $200
$200 + $600 = $800
IF TRAILERS WERE ELIMINATED:
Fund or bond: You would be billed for $800 and the cost of owning your mutual funds would drop by an offsetting amount because trailers would no longer be included.
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: ROB CARRICK
© 2007 The Globe and Mail. All rights reserved.
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