Fees, Commissions & The Trusting Investor

11. July 2009 by Dan Walkow, CFA, CMT.

It’s about time. Most investors are trusting souls who believe that the regulatory framework protects them from excessive investment management fees, commissions and financial advisers from self dealing. Self dealing is where a bank or broker directs clients to their own products which often have higher fees or commissions that competing services or products.

These legal but punitive fees and commissions have been going on for a long time both in Canada and the United States. Over the course of my 30 years in the investment business I can attest to having pretty much seen it all.

That may be about to change and its about time. From Bloomberg:

The U.S. Securities and Exchange Commission would gain power under an Obama administration proposal to ban pay practices at brokerages and investment advisers and prevent individuals from working in the industry. 

The Treasury Department sent Congress legislation yesterday that would let the SEC prohibit “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure lets the agency remove individuals who violate rules from all aspects of the industry, rather than a specific segment such as selling securities or managing money.

Types of compensation practices the SEC may deem improper might include banks paying brokers more to sell “in-house” investment products, rather than those offered by competitors, he said.

“There has always been a concern that because these people are acting in an advisory capacity, they might be operating under pay practices that are in their interest, not those of their clients,” said Mark Borges, a principal at Compensia Inc., a San Francisco-area pay consultant.

There is no movement afoot in Canada yet but, in my opinion, if the bill passes in the USA I suspect pressure will build for Canadian authorities to take similar action. In fact we need it more in Canada as fees and commissions in Canada tend to be much higher than the USA. For example mutual fund investment management fees tend to be almost double that of the USA. Why? You have every right to ask.

This brings me to the insurance industry and products such as variable annuties, segregated funds and other products such as life, critical illness and similar products.

Fees and commission disclosure in the insurance industry is muted at best and hidden at worst. If you ask you will be told that it is all included in the policy and is not an “on top” charge. However, just for fun, if you intend to buy one of these products ask for a disclosure letter outlining exactly what fees, commissions and administrative charges you will face and how much compensation your advisor will receive.  Do not rely on the companies information in their documents but ask for a letter specific disclosure letter regarding the products you are contemplating.

You may not get a letter, and if so you know what you have to do! If you succeed I suspect the numbers will give you pause…

See the Bloomberg article here.

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