The manner in which investment advisers are paid is one of the weaknesses of the financial services industry.
There is much wrong with the current remuneration system and it is reasonable to expect some changes.
This month a University of Toronto professor shed some light on the structural problem of adviser compensation and added fuel to the argument of an industry conflict of interest between advisers and clients.
Professor Susan Christofferson is an associate professor at the University of Toronto’s Rotman School of Management. Her research was published in the February issue of the Journal of Finance and it is thought to be the first of its kind.
Christofferson’s research has revealed U.S. advisers consistently recommend mutual funds that pay a higher rate of commission even though the funds recommended have an inferior performance track record.
She used publically-available data from the U.S. Securities and Exchange Commission from 1993-2009. In a classic case of “follow the money,” Christofferson discovered the more money that was paid to brokers, the more a particular fund was sold.
Without any information to the contrary, Canadians will assume this is the case in our country. We are high users of mutual funds and the industry is approximately $800 billion. Our mutual fund fees are some of the highest in the world and increasingly Canadians are curious about those fees.
The Canadian Securities Administrators are looking into the whole issue of fees and other industry practices — one of their goals is to build trust.
In my opinion, it is impossible to build trust unless there is transparency. Hidden fees are not transparent. The U.S.-based research will cause some to assume this practice is also prevalent in Canada.
Fees are a popular topic because investment returns are low as a result of recent volatility of the stock market and current low interest rates. Fees are eroding Canadian investor’s’ returns when they are too high.
Canadians have every right to complete and fair disclosure.
How can investors make informed investment decisions until they clearly see all of the fees they are paying?
Trust is largely dependent upon transparency and it is time Canada eliminated the secrecy of investment fees.
There are two ways this can happen. First, the securities regulatory bodies could change the rules and force full disclosure.
The second way this could happen is from you the investor.
If the majority of investers just started to say ‘no’ to hidden fees and current remuneration methods, the industry would be forced to change its ways.
That is the beauty of capitalism. If there is a financial incentive, companies will change. However, with polite and complacent Canadians not questioning the current commission regime, it is highly profitable for companies to maintain the status quo.
My sense is the appetite for understanding fees and all aspects of the investment business is strong and growing.
We can all hope this momentum will continue to build and changes will come as a result.