There was a small uproar when the Canadian Securities Administrators decided that they would not move forward with banning embedded commissions. Rob Carrick commented:

The dream of creating a standard of transparent, client-focused service in the investment industry died Thursday.

It is certainly true that eliminating embedded commissions would have increased transparency and more closely aligned the interests of clients with those providing advice.

The problem that nobody is talking about is that most financial advisors are still convinced, despite the mountain of evidence to the contrary, that active management is necessary for their clients to be successful.

Eliminating embedded commissions would not change this view. I do not know if anything would. The industry perception seems to echo that of Fischer Black when he left MIT for Goldman Sachs:

The market appears a lot more efficient on the banks of the Charles River than it does on the banks of the Hudson.

In other words, the market looks a lot more efficient in the academic research than it does on the ground in practice. Fischer’s comment was lamenting the challenges of implementing his research, but in my experience most financial advisors have the same sentiment.

Those clueless academics pushing index funds have no idea what it’s like on the ground…

Those giving financial advice are subject to the same biases as individual investors, leading them to believe that they are able to provide market-beating advice. This usually leads to higher risks and costs to the client, and a relationship that is based on performance over financial advice. In the face of irrefutable evidence, the broad community of financial advisors in Canada is still intent on using active management in order to serve their clients in what they deem to be the best possible manner. From a recent survey:

In fact, 86% say the risks in the market add up to an environment that favours active management. These professionals demonstrate a clear preference for actively managed investments and continue to allocate the majority of assets to these strategies.

I am not the first person to suggest that a best interest standard would not solve the problem. A 2017 paper titled The Misguided Beliefs of Financial Advisors found that Advisors trade frequently, chase returns, prefer expensive, actively managed funds, and underdiversify their own personal investments, just as they do for their clients’. This indicates that the bad investment advice is not malicious, but misguided.

Financial advice is not at a point where there is consensus by practitioners on how evidence should be applied. There is academic consensus about the evidence, just not a willingness of practitioners to apply it. In a 2016 Freakonomics episode Vinay Prasad, MD, MPH, explained that there was a time not too long ago when medicine was practiced in a similar manner to the way that investment advice is given today.

The reality was that what we were practicing was something called eminence-based medicine. It was where the preponderance of medical practice was driven by really charismatic and thoughtful, probably, to some degree, leaders in medicine. And you know, medical practice was based on bits and scraps of evidence, anecdotes, bias, preconceived notions, and probably a lot psychological traps that we fall into. And largely from the time of Hippocrates and the Romans until maybe even the late Renaissance, medicine was unchanged. It was the same for 1,000 years. Then something remarkable happened which was the first use of controlled clinical trials in medicine.

In the world of financial advice, we are still in this phase, where evidence does not have the final say in the advice given to clients. This may take a long time to change. In the same Feakonomics episode, Iain Chalmers, a British health services researcher, explained:

There was a great deal of hostility to [evidence-based medicine] from, I’d say, the medical establishment. In fact, I remember a colleague of mine was going off to speak to a local meeting of the British Medical Association, who had basically summoned him to give an account of evidence-based medicine and what the hell did people who were statisticians and other non-doctors think they were doing messing around in territory which they shouldn’t be messing around in. He asked me before he drove off, “What should I tell them?” I said, “When patients start complaining about the objectives of evidence-based medicine, then one should take the criticism seriously. Up until then, assume that it’s basically vested interests playing their way out.” I would say it wasn’t actually until this century [that evidence-based medicine took hold]. So one way you can look at it is where there is death there is hope, as a cohort of doctors who rubbished it moved into retirement and then death, the opposition disappeared.

Until we reach a point of acceptance of evidence as the most sensible way to guide investors, a best interest standard is meaningless. If the medical profession is any guide it may be a generation or more before evidence-based financial advice becomes mainstream.