I recently read an opinion piece in the Vancouver Sun, penned by Wanda Morris, Vice President, Advocacy, at CARP. In this piece, she laid out her organization’s position on embedded compensation for financial advisors.
At Invesco, we strongly believe in the efficacy of advisors in their role of helping Canadians navigate financial matters.
For many years now, Invesco has championed investor choice in the debate over mutual fund and dealer fee structures. We believe this is important because not all investors are the same, and not all investors need, want or benefit from the same fee structures.
While I am always happy to engage with the public on the topic of advisor compensation, I was troubled by the inaccuracies and outrageous comparisons in the piece by Ms. Morris.
Firstly, any comparison between advisor compensation and slavery is, quite frankly, inappropriate. Comparisons to solving poor air quality or income inequality, fine. Slavery crosses a line.
That aside, there are claims in this opinion piece that do justify a response.
Ms. Morris repeatedly refers to “hidden commissions,” which is grossly misleading. The embedded compensation paid to advisors and their dealers is far from hidden.
According to a survey by CARP, 86.5% of respondents either agreed or strongly agreed that “providing investors with additional information about all the fees that they pay on each statement (i.e., fees for both advice and for fund management) will improve investors’ ability to make sound financial decisions.”
Good news: With phase II of the client relationship model (CRM II) in effect, client account statements are currently required by regulation to do exactly that. While mandatory disclosure is relatively recent, many advisors have been providing this information throughout their careers in client meetings. So how exactly are these fees hidden?
With full disclosure in hand, clients are able to make informed decisions that affect their financial futures. Those who are not comfortable with embedded commissions already have alternatives, namely fee-based advisors and discount brokerages. To prohibit trailing commissions would be unfair to investors, who would immediately lose a purchase option that tends to favour small investors.
I also disagree strongly with the author’s claim that all forms of embedded compensation are “fundamentally harmful” and must be banned.
Ms. Morris states that 79% of CARP members (at least of those who responded to their survey) sought a ban on embedded compensation.
Looking at the full survey results, I find this unsurprising, as the survey leads the respondent toward favouring a ban, by, among other tactics, suggesting that embedded compensation “can” encourage advisors to recommend products that are in their interest, not their clients’.
While this is a possibility, does it actually happen? The claim is dubious at best – the independent fund companies with the greatest sales success generally pay an industry standard 1% embedded compensation. There have been outliers; the most notable ones have been addressed by the OSC for their sales practices.
Otherwise, there is little support for the claim that fund companies compete for advisor loyalty through over-sized sales commissions.
Still, the perception of this conflict is serious. Fortunately, it can be resolved simply by regulating a set price on embedded advisor compensation, which Invesco called for in our submission to regulators. If the embedded compensation on all non-fee-based funds is the same 1%, there can be no conflict of interest in fund recommendations. Because this would apply only to embedded compensation, the rapidly evolving fee-based model would be unaffected.
Ms. Morris decries the practise of “locking in” a client’s assets with punitive redemption charges. Here, she is referring to the Deferred Sales Charge (DSC) option. Invesco supports regulators taking a closer look at the use of the DSC option and discussing its merits with dealer firms. It should be pointed out that the DSC can discourage rash decisions by investors, who might otherwise sell their holdings in times of market downturns.
While conflicts of interest do exist in the financial services industry, I do not believe that the current system of fully transparent commissions is one of them.
At Invesco, we remain steadfast in our advocacy of choice and transparency in the marketplace, and believe that a ban on embedded compensation would cause more harm than good. It shouldn’t matter how clients pay their advisors, so long as it’s transparent, agreed upon by both parties and the advice received puts the clients’ best interests first.