You take your car into a garage for a major repair. You don’t bother to get an estimate beforehand and when the job is done, you don’t even look at the bill; you just pay it. Year after year, you repeat the same scenario.
An appalling lack of prudence, you say? I agree and thankfully few people would actually take care of their car in this way. But, sadly, this is the way many people pay for investment advice—an expense that’s often much higher than maintaining a car.
That’s the conclusion I came away with after reading a summary of investor focus groups organized late last year by L’autorité des marchés financiers (AMF), Quebec’s financial regulator. The AMF brought together 27 ordinary people to ask them about their investing knowledge, experiences and attitudes.
In the recently released summary of those sessions, here is the line that caught my eye: “The majority of participants stated that they knew their dealer was compensated for the services rendered, but they could not say how or how much their dealer was compensated for these services.”
Other findings included the following:
- the majority of participants had no recollection, or a vague recollection, of having read a document setting out the annual compensation of their dealer
- a few of the participants recalled having had a discussion with their representatives about dealer compensation and investment fund fees, but could not provide details
- certain participants seemed to generally confuse dealer compensation with other charges, such as fund or banking fees
Now, you may be tempted to blame the investors for not being more diligent about finding out about how their advisor is being compensated. And you would be right that a share of the onus to be informed should be on the person who’s buying a service.
But you would also be blaming the victims of Canada’s contorted system of financial regulation that still allows companies to get away with charging so-called trailing commissions—fees embedded in the management expense ratio of mutual funds.
Canada’s financial regulators recently declined to follow the lead of other countries and ban these commissions. That was a bad decision and needs to be reversed.
In 2017, new regulations did come into effect, requiring advisors to disclose trailing commission to their clients. However, as the AMF’s focus groups show, many investors are still unaware of how or how much they are paying for the advice they get. What’s more, other fees associated with managing funds still don’t have to be disclosed, including portfolio management fees, fund operation expenses and transaction fees.
In April, the Mutual Fund Dealers Association of Canada released a discussion paper asking for industry feedback on how to improve the disclosure of all the costs paid by investors.
At PWL, we believe investors should pay a fee for the advice they get in the same way you pay a lawyer or an accountant. All other fees should also be disclosed. That’s a transparent, easy to understand and common-sense way to charge clients.
All investors should have the right to the same fee disclosures that PWL clients receive. That would be a large step towards ensuring Canadian investors are afforded world-class protection.
From there, it will be up investors to take advantage of that protection by reading their statements, talking to their advisors and taking the time to make well-considered decisions.