Commission ban could be bad move, says CFA

Regulators should tread carefully as they consider all-out bans on commissions, suggests a recent CFA Institute report.

Highlights of the global study include:

• Larger financial institutions are moving away from providing advisory services to smaller clients because of a lack of economic incentive to serve those clients.

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• In markets that ban commissions, new platforms with direct-to-consumer or low-cost/low-service investment options are expected to proliferate. This shift may result in aggressive direct-to-consumer advertising of financial products, a practice that may lead to instances of inappropriate investments sold to retail clients without proper oversight.

• A lack of proper enforcement of existing rules meant to combat mis-selling and inducement abuses is also a problem because a number of regulators lack either the resources or the ability to enforce investor protections already in existence.

• Retail investors tend to prefer a commission model to a fee-for-service model, which complicates the move toward fee models in markets that have banned commissions and may result in a large underserved population.

Read: Keep embedded commissions, says Invesco president

• Investors often fail to understand just how much they are paying advisors, whether they are operating under a commission or a flat-fee structure. Greater transparency requirements and more investor education will help investors make better-informed decisions.

• Most of the reforms around inducements have taken place in the past few years. Investor behaviour and response to new products and advice schemes are not entirely predictable, and reactions in markets where reforms have been introduced should be closely observed.

• CFA Institute members who responded to a CFA Institute survey stressed the importance of improving transparency and disclosure and were wary of any policy reform that would diminish the incentives to open distribution networks or reduce the accessibility of investment advice for small retail investors.

Read: How to frame fees

In a letter to Advisor.ca, CFA Institute stated the following: “[T]he use of inducements present[s] significant challenges for investors and those working within the financial industry. CFA Institute is calling for greater disclosure and transparency on commission structures that would allow investors to make more informed decisions and would contribute to the restoration of trust within the industry.”