Later this month Canadian regulators are expected to reveal new proposals on the way financial advisors deal with their clients. However, suggestions that commissions should be banned are not the answer.
That’s the verdict of a new study by the School of Public Policy at the University of Calgary. It has delved into the issue of unbundling fees from investment products and suggested that in countries where the idea is already being implemented – including Australia and the United Kingdom – it has inadvertently created a “gap” in advice.
Currently, provincial regulators across the country are examining whether embedded fund fees should be introduced here. However, the report highlights that in the UK the number of financial advisors has plummeted since fees and investment products were unbundled: slipping from around 40,000 to 31,000 since 2011. In addition, the number of investment accounts worth less than £100,000 has also halved. According to the research’s author Pierre Lortie: “many clients are unwilling to pay upfront for unknown results.”
This, he believes, is having a negative effect overall because statistics prove that those who receive professional advice typically save more and are able to accumulate additional wealth – however, this reform is effectively separating investors and advisors and that, he believes, is “counterproductive”.
His assessment is backed by the Financial Advisors Association of Canada (Advocis), which has a long-standing message that banning commissions will restrict access to financial advice among those who need it the most.
“Mr Pierre Lortie’s research strongly aligns with the association’s call to raise the bar for financial advisors through higher education standards and the creation of a profession. It also emphasizes the importance of preserving choice in how investors pay for financial advice,” said Greg Pollock, president and CEO of Advocis.
“We encourage regulators and policymakers to consider this study when making a decision that could unintentionally prevent thousands of Canadians from accessing the professional advice they need to prepare for retirement.”
The study notes that instead of banning commissions and creating an advice gap, a more effective solution to the problem of potential conflicts of interest is to enhance the proficiency and professionalism of financial advisors. The paper recommends a stronger emphasis on standards, continuing education programs and other means to improve the competencies and proficiency of financial advisors.
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