Why are investors paying fees that eat away at our lifetime earnings?
The answer is simple: there is no fiduciary standard that governs the investor-advisor relationship. This means financial advisors are often motivated to select a product that pays them the highest commission, rather than one that is in the best interest of their client.
What is Canada waiting for?
The United States, United Kingdom, Australia and the European Union investment industries operate under regulation to advise in their clients’ best interest, regardless of their own compensation.
Yet the debate in Canada on whether advisors should have a fiduciary duty continues. If fact, it’s been going on for over a decade. Despite a major consultation paper, two pan-Canadians studies, and an industry round-table on the importance of a best interest standard, governments and regulators are dragging their feet.
How much are Canadians losing?
Canadians have more than one trillion dollars invested in funds with high fees ranging from 1.5 – 3.5% charged by funds, brokers and banks. Yet, there are cheaper fund options with fees as low as .5% that over the long-term outperform funds with higher fees. Imagine how many retirement dollars are lost to high investment fees.
For example, an investment of $100,000 compounded at 5% with no fees would grow to $338,635.50 over 25 years, implying a return of $238,635.5. An investment of 100,000, assuming a 5% return and 1.5% fees would grow to $232,080.30 by the end of year 25, representing a dollar return of $132,080.30.
Based on these numbers the investor would see his or her return reduced by $106,554.70 or approximately 45%. (Source: Morningstar, Data generated using Savii Financial Concepts MER Calculator)
How can this be remedied?
- Put investor returns ahead of advisor compensation
This is best achieved by adopting a ‘Best Interest Standard’ in which advisors must advise in the best interest of their client’s financial returns – and not their own commission.
It means that an advisor could not:
- sell you a mutual fund that pays a significant commission when a more competitively priced option is available
• recommend proprietary funds created by his or her firm if they are underperforming the market, just because their bonus is tied to sales of these products
• secure long-term commissions by locking you into products with long-term deferred sales charges when cheaper, more flexible alternatives abound
Countries from the United States to Australia have embraced the idea of a best interest standard. It’s time Canada does too.
- Eliminate Embedded Fees and Pay Advisors Directly
These are fees which are paid from the fund directly to the advisor and hidden within the total Management Fee (MER).Because different funds have varying commission structures, some advisors may steer their clients into funds based on the funds’ commissions to advisors rather than the suitability of the fund for their clients.
- Eliminating embedded fees ensures advisors’ recommendations are not swayed by inflated commissions.Regulate titles used by those who sell investments
There is a dizzying assortment of titles used by those in the financial industry. Often these titles imply a level of skill, knowledge or experience beyond what the financial advisor possesses.
Wanda Morris, CARP’s VP of advocacy notes, “I’ve spoken to members who have placed undue trust in financial advisors because their titles, such as Vice-President or Seniors Specialist, implied a level of competence and a duty of care that was unwarranted.”
CARP is calling upon regulators to develop a short list of approved titles that describe clearly the regulated activities that the holder is qualified to provide. CARP is calling for the elimination of titles that are not approved and regulated, which can be misleading and often simply contribute to confusion among investors.
CARP has launched a Protect My Savings campaign, calling for government action to protect investors’ life savings from fee gauging.
Submitted by CARP Georgian Bay #14