The Globe and Mail headline said it all: “It just became clear we’ll never see an investment industry where clients must come first.”
The despairing headline was over a story about long-awaited proposals from provincial securities regulators to beef up investor protection.
Sadly, regulators bowed once again to Canada’s powerful investment industry and failed to embrace two key reforms that PWL Capital and other investor advocates have been pushing for years. Those reforms are:
- A ban on fees embedded in mutual funds for advisor advice. Commonly known as trailing commissions, embedded fees have been prohibited elsewhere in the world. They should be outlawed in Canada too. In their place, advisors should charge clients directly for the advice they receive, just as lawyers and accountants do. Why are embedded fees so bad? They aren’t transparent to investors and research shows they encourage advisors to push funds even when they perform poorly.
- A requirement that investment advisors act in their clients’ best interest. Also known as a fiduciary duty to clients, this is another reform that has been embraced by other countries. In Canada, advisors are held to a lessor standard—the obligation to recommend investments that are suitable for clients. In May 2017, provincial regulators, except those in Ontario and New Brunswick, abandoned consideration of a proposal to implement a best-interest standard nationwide.
The recent proposals from securities regulators do beef up the suitability requirement to include the cost of investments in addition to other factors such as riskiness. But they still don’t go far enough to ensure advisors aren’t putting their interests ahead of those of their clients.
The investment industry in Canada is dominated by huge banks and insurance companies. It’s not surprising they have consistently succeeded in watering down investor protection proposals, given their lobbying and marketing might.
The results are evident in Canada’s investing landscape. We still have some of the most expensive mutual funds in the world, according to this study by Morningstar. And a recent spate of enforcement actions show client interests still come second to the search for profit at many firms.
These are issues that I’ve been hammering away at for many years. So, I am as disappointed as anyone at the failure of regulators to take stronger action. But should we just throw in the towel and say: “This is as good as it’s going to get?” I say no. We must keep up the pressure for change.
It’s been a tough fight over the years, but we have made progress. For example, disclosure requirements for fees and annual portfolio returns have been significantly strengthened. And, the much-criticized deferred sales charge (DSC) option for mutual funds sales was banned in these latest proposals.
To my mind, these are reactions to demands of investors who are finally getting wise to the devastating impact that high fees and conflicts of interest have on their wealth. I believe continued vigilance and calls for change, combined with the forces of innovation, will bring more progress.
There is a better way and we at PWL Capital are demonstrating that every day with our commitment to scientific investing, transparent fees and always acting in our clients’ best interest.
I, for one, won’t give up the fight to bring the benefits of our approach to all Canadian investors.