Backtracking is never a good sign.
In 2013, the United Kingdom instituted its Retail Distribution Review [RDR], which forced advisors to charge upfront fees to their customers rather than receive commissions from companies supplying financial products.
The industry feared it would decimate the ranks of advisors and cut off advice from smaller investors – and it appears those fears weren’t unfounded.
Statistics suggest that client numbers have fallen since the implementation of the new rules, and many have wondered whether the changes are to blame.
Now, it appears the UK is admitting that it has a problem. The Financial Conduct Authority’s acting CEO let the cat out of the bag in January when he mentioned that he was exploring reintroducing some form of commissions to the country’s wealth management industry.
“We do not want to go back to a world where we had the problems of the pre-RDR,” acting FCA CEO Tracey McDermott told the BBC’s Money Box program. “What we do want to look at is actually what is the best way of delivering advice and guidance across the market, so I wouldn’t rule out that there may be some element of commission, but we are not going to reverse the RDR.”
Given the copycat nature of governing bodies, it stands to reason that this change of heart by one of Canada’s regulatory role models would force their counterparts here to put the brakes on any hasty move to eliminate commissions.
“As we’ve seen in the UK and other markets, once those things happen, there’s disintermediation, and you’ve got a number of smaller clients that can’t get advice, and I think that would be a mistake,” says Tuula Jalasjaa, CEO of HollisWealth.
Not only did it affect the public’s access to financial advice, but the UK’s move also severely downsized the ranks of advisors, sending numbers tumbling from 40,000 investment advisors registered in 2011 to about 31,000 currently.
“With the problems the UK has experienced – regarding rising costs for advice and dwindling numbers of independent advisors – I find it hard to believe that there will be an outright ban on commissions here in Canada,” says Sean Harrell, partner and senior advisor with Howe, Harrell & Associates. “In this case, the UK was a guinea pig for us, and I hope our regulators learn from their experiences, positive and negative.”
But the concern around commissions still lingers. “Advisors are worried about whether trailers going to be banned,” says Jalasjaa, who travels regularly to speak with advisors. However, the final stage of CRM2 should solve any issues regulators might have around trailing commissions, she says.
“If CRM2 does what it’s intended to do, and you’ve got transparency around fees, then there should be no need to ban trailers,” Jalasjaa says. “Worst case, maybe they get capped.” Harrell agrees that CRM2 should eliminate the need for an outright ban of embedded commissions.
“I 100% agree that investors should know exactly how much they are paying for our advice,” he says. “But I don’t think that means we need to ban embedded commissions. I believe that if an investor is given a choice of programs – commission-based or fee-based – and the programs are explained and policed properly, there is room for both commission and fee-based planning in Canada. And that should provide Canadian investors with the options they need to feel confident that they are receiving good value from their advisors.”
There seems to be a groundswell against commissions, however: Several reports denigrating trailers have emerged over the past year. The Brondesbury Report, released in June, suggested that fee-based compensation is likely a better model than commission based compensation, but softened its stance by suggesting there’s not enough evidence to determine conclusively that the former compensation model delivers better long-term outcomes for investors.
Meanwhile, the Cummings Report, released in October, suggested the influence of past performance on fund sales is considerably reduced when fund manufacturers pay sales and trailing commissions. However, for her part, Jalasjaa considers these reports inconclusive at best.
“I think there have been some errors around the methodology of some of the studies they’ve done on how trailers influence behaviour,” she says. “I think if you’ve got transparency, and clients know what they’re paying, and advisors are giving value and the client perceives it as a value, then there would be no need to ban trailers.”