Commissions Being Banned For Financial Advisors
Perhaps in light of the recent financial turmoil, more people around the world are waking up to the fact that many financial advisors are salespeople since many are paid based on commissions. This leads to a structural bias in the system that not all can rise above. Different products pay different amounts of commissions and a loose rule of thumb is that the riskier the investment, the juicier the commission.
UK To Ban Commissions to Financial Advisors
Earlier this year in June, it was reported that the Financial Services Authority (FSA) in the United Kingdom had decided that commissions to financial advisors would be flat out banned starting in 2012.
The FSA has published a consultation paper on the Retail Distribution Review (RDR), which as its name indicates, reviews the retail distribution of financial products and services. The proposals for change are listed here and you can download the Retail Distribution Review paper by clicking here.
This has been all the buzz lately when chatting to people in the industry because now that a precedent has been set, will other countries follow?
Yep.
Australian CFPs May Not Be Allowed To Accept Trailing Commissions
I read an article by Mark Noble yesterday titled, Australian CFPs Forced To Abandon Trailers, in which he explains that members of the association which is responsible for giving out the Certified Financial Planner designation (CFP) in Australia will no longer be allowed to collect trailing commissions from product providers if they wish to maintain their CFP designation.
You can read Mark Noble’s article by clicking here.
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Comment by Henry on 20 August 2009:
It is the norm for Registered Investment Advisors in the US to compensated on a fee basis not on commissions. In a way, RIA system in the US is one step ahead of everyone else and is the fiduciary model that other countries or systems will follow. Like John Bogle, I believe strongly in a fiduciary system.
Comment by Gerry on 20 August 2009:
Removing the trailers is a great idea. The last three financial planners I’ve interviewed all proposed portfolios made up of mutual funds that significantly lagged their indexes, had very high expense ratios, and paid a fat trailer to them. Without exception, when I’ve suggested just buying simpler index funds/ETFs they have come out against them. In one case, when I pointed out a different version of a mutual fund paying a lower management fee (and smaller trailer), they objected. Needless to say, none of them are getting a cut of my money.
Comment by Ink-stained gorilla on 20 August 2009:
The only thing to keep in mind with advisor compensation – in addition to what has been mentioned – is that advisors can offer valuable advice beyond mutual funds in tax, estate and insurance planning.
Also, most of your portfolio’s performance may indeed come from strong asset allocation as opposed to the performance of the indvidual underlying funds.
Insurance and investment products are how many get paid. The difficulty is differentiating good planners from sales people.
If you can’t monitor all of this yourself – you might find paying an advisor worth your while. Trailer is one way to do this. It’s impressive what a well designed financial plan can do. Emphasis being on “good”.
Pingback by The RR Top 5 (or 7?) | Realizing Retirement on 21 August 2009:
[...] at Where Does All My Money Go? talks about Commissions Being Banned For Financial Advisors (no, not in Canada [...]
Comment by Thicken My Wallet on 21 August 2009:
Preet- here is my question- do you think advisors should move to a billable hour model and if they buy products on behalf of clients, they charge them as disbursements with no mark-ups?
The issue with that model is that it flies in the face of the “everything is free” ethos of our society so push back would be great.
The UK proposals are also in consultation stage. It will be interesting to see how watered down they are when approved. If the economy starts to turn and the consultation process drags on into a job recovery, I am not sure they will push as hard.
Have a good weekend.
Comment by Preet on 21 August 2009:
@Thicken My Wallet – I don’t know what model would “work” best. Theory and practice are of course two different things most of the time. I agree that if we have a great recovery we will see more lobbying against the change, but for now no one is willing to voice their disagreement too much as they don’t really have a leg to stand on.
I could see a flat rate, or hourly accounting for financial planning. I could see a separate model for investment execution and monitoring. Right now its too bundled (on the whole).
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Pingback by Thicken My Wallet » Blog Archive » Will more mutual fund regulation doom the ETF market? on 24 September 2009:
[...] As reported by Preet previously, regulators in various jurisdictions are proposing to eliminate mutual fund companies from paying commission to investment advisors to secure sales or to accept [...]
Comment by Anonymous on 29 September 2009:
Anyone paid commissions or referral fees = salesperson. It’s not hard to differentiate
Comment by Anonymous on 29 September 2009:
Hiding fees and charges should be a crime. Then people will understand the real price of “free” advice (usually multiple times a fee-only planner’s rate).
If people can’t count on the government to stand behind social security, or companies to stand behind their pensions, the least they should get is proper regulatory oversight of the financial industry. Commissions need to be banned.