Get on with it. The problems with the current model are well known and become more obvious every day. A new model has already been implemented in other parts of the world. There’s been enough consultation. Now it’s time for action.
That is a summary of the report issued this week by the OSC’s Investor Advisory Panel, a seven-person group. “Regulators are now well aware of the changes that must be made to protect investors and foster an industry that puts investors’ needs first and foremost. This means,” the report said, “introducing a best interest standard, eliminating conflicted compensation and making access to restitution and dispute resolution a reality for Ontario investors.”
Specifically, the panel wanted the OSC to “prohibit the payment of embedded trailer commissions,” to harmonize regulation so that the “same rules [apply] for comparable services and products,” and to be aware that “in many cases, know your client [KYC] process is not being followed.”
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While the solutions have been obvious for years, the industry has only taken small steps. That may change because of the timeliness of the report: recently the U.S. Department of Labor proposed a series of rules to address conflicts of interest in retirement advice. In effect the proposals require advisers serve the best interest of their clients.
The report is sweet music to Som Seif, a former investment banker, who formed and sold one ETF manager (Claymore Investments) before starting Purpose Investments in 2012.
“Everyone would agree that clients’ interests need to be the number one priority in all things. If we put in the proper policies around the fiduciary standard/best interests, it will [make] the industry better for clients and advisers,” he added noting banning trailer fees isn’t “necessary” provided “best interests” and “transparency” are part of the client equation.
Seif is a firm believer in the need for clients to get advice. “The industry is fraught with potential of conflict and we need to move away from that.” Part of that conflict arises because some products are manufactured and distributed under the same roof.
“As long as the industry allows for manufacturing and distribution to be aligned, then our industry is going to have structural issues,” he stated, noting currently there’s no “free market” and the banks are “expensive.” Seif said a best interest standard “will be a positive for investors and advisers.”
Some distribution players are being ‘dominated,’ and ‘shutout’ by the banks.
With “proper rules,” Seif argues advisers at bank-owned dealers “won’t have to fight the system,” meaning they can gladly not sell funds created by their employer.
“They [the advisers] can rely on the rules to do what they want to do,” he said noting that, currently, some distribution players are being “dominated,” and “shutout” by the banks. That will presumably change as “higher quality products that are better models for the client,” become available. Seif is a firm believer in a fee–based [as opposed to fees based on transactions] model.
Chris Reynolds, chief executive at the Investment Planning Counsel, said the panel “is headed in the right direction. The best interest standard [is a goal] every adviser should endeavor to do that.”
Reynolds said “definition” is required around the best interest standard. “It is pricing or product,” he asked, adding he’s “not necessarily convinced” of the merits of banning trailer fees. “Whether it’s embedded or not, it shouldn’t make too much of a difference,” he said, noting that under a pay-for-advice model some clients may balk at the upfront fee.