The following opinion article was produced by John DeGoey, a portfolio manager with iA Securities (IAS).
The mutual fund industry has no moral authority left when it comes to retaining embedded compensation. The Cummings report has shown that embedded compensation causes conflict and, as such, the people who are pro client choice are effectively pro conflicted advice.
Speaking personally, I trust conflicted advice about as much as I trust Mexican tap water. The option is biased, conflicted and contrary to the client’s best interests. A more truthful and complete rallying cry for the pro client choice advocates would be: “choose conflicted advice”. Alas, they dwell on the ‘choice’ aspect while saying nothing to acknowledge the clearly-established evidence of advisor bias.
At present, most mutual funds are sold on a zero per cent front end basis and usually pay advisors a one per cent trailing commission. If embedded compensation was to be banned and advisors were free to charge separately for their advice, access to (cost of) advice should be virtually unaffected. Advisors could use identical rates and identical products if that was their wish. Either consumers understand what they are paying or they do not. If they do understand, how does paying the same amount shrink the advisor population or make advice unattainable? If they do not understand (and after nearly 30 years of trailers being available, there is no credible reason why advisors should not have been able to communicate this), then clearly bolder steps need to be taken. I doubt the provisions of CRM2 would do the trick. Eliminating embedded compensation would.
When looking at the RDR experience in the UK, we see that as soon as embedded compensation was banned, advisors quickly moved to lower cost products – effectively lowering the total cost for consumers. Why do so many commentators focus on the cost of advice while remaining silent on the cost of investment products? Everyone knows that investors pay the totality of the bill. Specifically, if the embedded compensation advocates (who merely masquerade as advocates of client choice) are concerned about investors having access to advice, then why are they silent on the important question of product cost, which is almost certain to drop as a result of unbundling?
My hunch is that the net total cost of investing (cost of advice + cost of products) would drop as a result of unbundling. In addition, correlation is not causation. To the extent that some Britons are no longer using an advisor, it may be that they became disgusted with the industry (once they learned how much they had been paying all along).
Choosing to forego advice is a far cry from not being able to get it. It is high time that our industry engaged in evidence-based decision-making. So far, I’ve heard a good deal of rhetoric, but have seen relatively little reliable and consistent information. The arguments put forward to protect the status quo seem weak and self-serving.
John J De Goey is a Portfolio Manager with iA Securities (IAS). The views expressed do not necessarily reflect the opinion of IAS or of Wealth Professional.
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