The new financial fee disclosure will be good for investors
May 21, 2015
The financial services business is finally going to evolve from the “dark ages” in about a year’s time. Investment salespeople will have to disclose how much money they are making when selling financial products.
The current regime is void of normal business disclosure and transparency. When you buy almost anything you are aware of the cost except when it comes to purchasing financial products.
The regulatory body that controls the sale of investment products is implementing new rules. As of July, 2016 there is going to be a requirement of fee disclosure.
The amount of investment fees and investment commissions is not being regulated: Just the requirement to have those fees and commissions disclosed.
Suddenly all investors will be aware of what is being paid to their financial advisor. And that will be the start of a serious shift in the financial services business.
Currently there is a tremendous dichotomy between the quality of financial advice being delivered. Some investors, when they understand their fees better, will think those fees are fair because of the excellent quality of financial advice they receive.
However there are going to be a significant number of investors who will be outraged to learn that high fees have been automatically paid to their advisor even though that advisor had given no or little useful investment advice.
We will enter a world of buyer beware. Be aware of what fees are being paid and be aware of the value of financial services you are receiving.
There will also be a financial advisor beware. When clients suddenly discover how little advice they had been receiving for the investment fees they have been paying, many are going to be angry. Very angry indeed.
Three firms recently released survey results of 1,000 investors with investable assets in excess of $10,000. The three firms are Marketing Directions, 21st Avenue Partners and PMG Intelligences.
Their research revealed almost one in three investors was unaware that they paid any fees for advice. This is consistent with other industry surveys done in the past.
Just more than 40 per cent believe that the dollar amount paid for advice is either too much or way too much. And finally more than 60 per cent of investors said they had not had an appointment with their advisor in the last six to 12 months to discuss fees.
In summary, the fee conversation is not part of the investor-to-advisor dialogue, a significant number of investors think mutual fund fees are too high and finally a significant number of investors are unaware they are paying advisor fees.
Fasten your seatbelts because this is going to get interesting: The investment business as we know it is suddenly going to explode. The free lunch is over.
All investors are going to have clear exposure to the amount of fees they are paying and will most certainly demand better and more financial advice. The financial services industry is in for a major change.
Our recommendation to investors is to clearly understand what financial advice you should be expecting to receive from your financial advisor. Types of advice include financial planning, investment advice, regular portfolio rebalancing, debt reduction strategies, tax advice and estate planning.
There is a chance that your current advisor is more of a “relationship person” and that their skills are better suited at managing the personal relationship. That is all well and good.
However their excellent personal skills must be augmented by more technical skills and if they don’t possess those skills themselves they should introduce you to somebody else within their firm that can be of assistance with the technical details.
A year from July the rules change. Investors are going to see the amount of investment fees they pay to their advisor.
The winner will be the client. They can expect and demand better financial advice.