Recently, I was at the Morningstar Executive Forums in Toronto and Vancouver, speaking on the future of financial advice. The topic has never been more timely, as the industry faces fintech disruption and the prospect of new regulations that are radically altering the landscape.
The Canadian Securities Administrators (CSA) continues down the path toward banning trailing commissions, and Invesco’s public opposition to such a ban began years ago and is well documented. With a new round of consultation underway, I appreciate the opportunity to lead the charge once again as this conversation continues.
As you may recall, the regulator believes that embedded compensation represents an irreconcilable conflict of interest. The argument put forth by investor advocates is that mutual fund companies compete for advisors’ loyalty by offering higher trailing commissions.
While some fund companies have pursued this route in the past, they were the outliers – relatively small firms seeking to gain scale. This was, without a doubt, to the detriment of their clients.
But the prospect of a ban on trailing commissions has led most of these companies to abandon the practice. The industry is trending toward fee-based advice, making oversized trailing commissions increasingly irrelevant.
At Invesco, we applaud the demise of oversized trailing commissions, and have advocated for a simple regulatory approach that would avoid their return: a mandatory cap on trailing commissions at the current standards of 1% for equity funds and 0.5% for fixed-income funds.
This rate is the de facto industry standard and implementing a cap would affect very few advisors.
The CSA is concurrently seeking to implement a “best interest” standard, mandating that advisors place their clients’ interests ahead of their own.
At Invesco, we strongly believe that the vast majority of advisors already put the best interests of their clients first, so mandating this behaviour through regulation wouldn’t pose a problem.
The final phase of CRM2 is already underway, which will ensure transparency on fees. With this information in hand, clients will be able to decide whether they are receiving value.
By capping trailing commissions at the same time, an investor would be reassured that the advice they received was in their best interest, and not driven by the compensation their advisor received.
In the end, 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 their best interests first.