* Regulators, investors mull changes to an adviser's duty
* Fiduciary duty, asset-based fee structure an option
* Industry may change before rules ever do
By Andrea Hopkins
March 29 While regulators around the world are
forcing financial advisers away from commission-based selling to
combat real or perceived conflicts of interest, a fractured
regulatory system has left Canadian investors lagging the move
to more transparent fees.
"You've seen compensation changes in Britain, you've seen
compensation changes in Australia, the same thing in the U.S.
And we still seem to be moving at a snail's pace compared to
what's happening around the globe," said Alan Fustey, an
independent financial adviser and author of "Risk: Financial
Markets and You."
As returns dwindle and financial markets lurch from crisis
to crisis, more investors are focusing on how much they are
paying for financial advice and products that aren't living up
In turn, the growing pressure for lower fees is squeezing
profits at Canada's biggest wealth managers as investors look to
alternatives like exchange-traded funds or self-serve
high-interest savings accounts to cut management expenses.
At the bottom of the debate is the fine line between what is
good for the client and what is good for the adviser, and the
age-old compensation scheme for advisers that rewards the sale
of more or different products, and embeds the fees within the
product itself, often paying out long after purchase.
In Canada, the most common form of compensation among
financial advisers is commission-based, particularly at the
lower end of the industry where retail investors are sold mutual
funds by advisers who charge no other fee for the advice.
Under current rules, advisers are required to ensure a
product is "suitable" for clients, but there is no fiduciary
duty that requires the clients' best interest be put before that
of the adviser, as is being contemplated in the United States.
"A requirement that client's interest is put first -- that's
unfortunately what many clients believe the situation is now ...
(while) the reality is the incentive framework is built around
trying to make as much money as you can for the firm, which
translates to commissions," said Ilana Singer, deputy director
at the Canadian Foundation for Advancement of Investor Rights.
"If there were a duty for advisers to put their clients best
interest first, it would go a long way toward helping clients be
invested in products that are better for them," she said.
It's not that Canadian regulators and even the industry
itself isn't mulling changes to the rules that govern the
several levels of advisers and different certification bodies --
one proposed model has been debated for 12 years and several
competing or complimentary rule changes are churning through
various stages of industry comment.
But Canada fractured regulatory system -- it is the only
major developed country without a national securities regulator
-- is one barrier to change. The Ontario Securities Commission
has pledged to build confidence in the investment process by
exploring the benefits of a fiduciary duty, but change in even
one province appears an uphill battle.
"This is a complex area and we need to review the
implications of imposing a 'best interests' or fiduciary
standard," Susan Silma, OSC director of compliance and
registrant regulation, said in an email. She said a consultation
paper is in the works.
The other obvious stakeholders are the fund companies and
advisers themselves. Some argue the need for change is not
proven, saying rules already prevent advisers from selling
"Just because compensation is on a product basis doesn't
mean it is not suitable and in the best interest of clients,"
said Karen McGuinness, vice president of compliance at the
Mutual Fund Dealers Association of Canada.
"Until I know what the gap is, I'm just not ready to jump to
a fiduciary duty model."
Still, while recent rule changes have improved fee
transparency, even McGuinness admits disclosure documents may
remain opaque to some.
"The way (fees) are calculated is not an easy determination
for anybody. But I do think the information is there and those
investors that are more sophisticated and more interested are
certainly able to find the information and determine generally
what it cost," she said.
While official change may come slowly, especially at the
retail end of the spectrum, market forces appear to be shifting
the landscape at the higher end of the investment ladder.
Data shows advisers in full-service brokerages are
increasingly taking a fee-driven approach in which investors pay
for the advice and management they get directly, usually as a
percentage of their assets under management.
"The asset-based fee business is growing quite rapidly
within the full service brokerage in Canada ... significantly
faster than the industry as a whole," said Guy Armstrong,
managing director at Investor Economics, a research firm.
In other words, advisers may see the writing on the wall,
shifting to what is seen as a more conflict-free approach to win
skeptical investors. But a model that works for investors with
large portfolios on which to base a fee may not translate to
retail investors buying C$500 worth of mutual funds.
That's where lower fee products like ETFs may come in, said
Fustey, who bills his own clients quarterly based on a
percentage of the assets he manages for them.
"As much as the advice component (of the industry) is
kicking and screaming because they don't want increased
disclosure and they don't want to change their compensation
structure, the growth of ETFs is a direct result of a desire to
reduce fees, and it's not something that is going to change,"
"There is no question more disclosure and reduced fees are
coming. It's just a question of when."