YOUR PRACTICE-Canadian financial advisers resist change to fee model

Mon Oct 28, 2013 4:07pm EDT

* Regulators mull ban on embedded fees, but change slow

* Industry argues for self-regulation, improved standards

* Supporters say fee-for-service more transparent

* Opponents argue fee-for-service will hurt poorest investors

By Andrea Hopkins

TORONTO, Oct 28 (Reuters) - Canadian financial advisers have watched regulators around the world ban embedded fees on popular products like mutual funds, but the slow pace of change in Canada has left them lobbying hard to preserve a profitable business model.

While Canada's relatively high fees on financial products were long overlooked when the economy boomed, low returns and the advent of low-cost products like exchange-traded funds (ETFs) have spurred calls for reform.

Advisers argue regulators are trying to reform the industry by changing fee structures as well as duty of care and disclosure rules even though Canada has not suffered the same abuses and failures that prompted changes in the UK and Australia. They say this will drive the cost of compliance so high it will hurt advisers and investors alike.

"We don't have the same problems they had," said Ed Skwarek, vice president of regulatory and public affairs at Advocis, the Financial Advisors Association of Canada.

Advocis, the umbrella association for both independent advisers and those working for Canada's big banks and insurers, is pushing for change from within, saying a move to impose standards on members is a better way to improve service than top-down regulation.

EMBEDDED VS FEE-FOR-SERVICE

Industry studies show investor concern with both fees and perceived conflict of interest in an industry where the most common form of compensation among financial advisers is commission-based.

This is particularly true at the lower end of the industry, where retail investors are often sold mutual funds by independent advisers who charge no other fee for the advice, but can collect embedded fees long after purchase.

"I don't think our industry's reputation is where it needs to be," Peter Intraligi, President of Invesco Canada, a unit of Invesco Ltd, one of the world's largest asset management firms, told advisers and investor advocates at an Advocis symposium in Toronto on Monday.

Intraligi said mutual fund companies like his will not be affected "in the long term" if Canadian provincial securities regulators impose a ban on embedded fees on the products his company sells, but he thinks investors should be given a choice.

More and more advisers are shifting to a fee-for-service model, where fees are often based on a percentage of assets invested or for time spent on a client, a system seen as more transparent.

But Intraligi said advisers and investors who prefer to have fees embedded in the products they use should be able to do so.

At the bottom of the debate is the fine line between what is good for the client and what is good for the adviser.

Many advisers fear consumers will resist financial advice when they have to write two separate checks at the end of a session - one for the product they wish to buy, and another for the expertise of the adviser across the table.

CHANGE ALREADY UNDERWAY

Wade Baldwin, a certified financial planner at Baldwin and Associates Financial Services in Calgary, said clients are not going to be willing pay an adviser "C$3,000 or C$4,000" for financial advice - though they may pay that much or more when fees are embedded in the products they buy.

"People are just not going to do that, so people are not going to have access to advice and the amount of advisers that get recruited to the industry is just going to get smaller and smaller and smaller, and so access to advice is going to suffer," Baldwin told the Advocis symposium.

But investor advocate Marian Passmore believes even small investors will pay if they think they are getting good advice in return for their money, especially if a fiduciary duty or legal obligation exists to act in their best interest.

"If you remove the third-party commission, advice will be less conflicted, and therefore in the interest of the client, and there won't be these biases whether conscious or not, that lead to perverse outcomes," Passmore, associate director of the Canadian Foundation for Advancement of Investor Rights, said in an interview.

Advocates of a "change from within" strategy hope to pre-empt regulation with an industry-led approach including higher educational and practice standards.

The industry may well be able to change before the country's fractured regulatory system can catch up. Canada is the only major developed country without a national securities regulator, which means proposed changes churn through one provincial body at a time.

Canada's federal government and two of its provinces agreed last month to set up a common securities regulator, but it is not expected to start operating until 2015.

But Passmore believes changes are inevitable.

"I'm optimistic that we will get there. Given the fact that we have a multitude of jurisdictions, the process takes a bit longer here, but I think the momentum will get us there."

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