A poll of CARP members showing that most respondents support a best interest standard and banning embedded commissions has some advisors up in arms.
As readers made clear, it wasn’t necessarily the concept of a ban they took issue with — it was our “slanted” (but factual) headline, “79% support embedded fee ban: CARP member poll,” that raised ire.
“While personally, as a fee-based advisor, the move to disclosure is fine by me […] is there anyone that wouldn’t support ‘actions to protect investors’ [as CARP advocates]?” wrote Adrian George on LinkedIn. “Not a very balanced headline when a major concern with banning choice for clients is the potential to put advice out of reach for many.”
Other readers questioned whether survey respondents, who were CARP members, were inclined to answer a certain way based on knowledge of their association’s advocacy. For instance, as our original article noted, CARP is running a petition on its website titled, “CARP Calls for Government Action to Put Investors First.” I asked Wanda Morris, VP of advocacy at CARP, whether the petition was public before or while the poll was in field (March 10-29).
“It was on our website earlier, but we didn’t promote it until after the poll was done,” she says, adding it would have been only accessible to people hunting for it on CARP’s site.
Morris concedes members would have known about CARP’s investor protection advocacy prior to the poll’s release. “It’s fair to say we did have a position before we went into the poll,” she says. “We have had a draft policy we’ve been working on for some time; we’ve made a number of submissions along the same lines. So I wouldn’t want to say we went into this with a blank slate and we’re waiting for our members to inform us.”
She says CARP presented both the positives and negatives of a best interest standard and a fee ban. “We tried to have conversations with people with views that are very different from our own and understand the rationale for their position,” she says, citing IFIC and Advocis as examples. “We tried to lay out for and against [arguments], and find out which ones [members] found compelling.”
Indeed, readers questioned whether respondents were given the all the facts. The survey questions, available here, do include detailed arguments both for and against the issues, including the argument that the ban and best interest standard could reduce access to advice.
I asked my colleague, Justin Graham, senior manager of content research at TC Media, what he thought of the poll’s questions. Graham has more than two decades of public opinion research experience at firms such as Ipsos-Reid and Pollara as well as an MA in public policy. He suggests CARP could have changed up the order of the pro and con arguments, and avoided stating explicitly whether an argument was for or against an issue. “By asking if [a statement] is a strong argument for X or against X, you are already biasing the respondent to what position you want them to take,” he says.
Morris says the pro/con arguments were grouped together because CARP wanted to “take our members logically through it. We could have randomized the arguments; we didn’t. […] I don’t think it would have been significant, and for the most part there was very little variation. People were strongly supportive of the positions we’ve been taking.”
Further, she adds, “When we take stands on behalf of our membership, we are informed by more than just polling results. We hear from individual members as well as our volunteer network, and we consult with experts who support — or oppose — particular positions.”
Alternatives to embedded fees
Morris emphasizes that CARP supports professional advice. “We think there is tremendous value in individuals having financial advisors. It’s not a critique of the value of financial advice,” she says. “Our issue is when people aren’t aware that they’re paying for it.” Another concern, she says, is the Cumming et al. research finding that embedded fees inappropriately influence fund flows.
Instead of embedded fees, she says, “fee for service is ideal, because then people can know exactly what they’re getting and negotiate it.” A percentage-of-AUM fee would also be appropriate. “What both of those do is they take away any incentive; any conflict of interest. They have the advisor put the investor’s interest first.” She adds that a transaction-based commission is also reasonable, “as long as it’s disclosed up front.”
Would CARP support embedded commissions being disclosed up front?
“It sounds appealing, but no,” says Morris. “People, I don’t think, necessarily have the market comparison […] especially if it’s done in terms of percentages as opposed to real dollars, and we continue to see that underlying market dysfunction with embedded fees.”
CRM2 documents are insufficient, she adds, since they don’t disclose the total costs of an investment. “I don’t think it’s gone far enough,” she says.
A true advice gap?
An Ontario-based IIROC advisor, who did not want to be named, noted that CARP’s petition advocates for the end of “fee gouging.” “Who would say no to that?” he wrote. “What they [CARP] aren’t saying is that a commission ban will increase costs and reduce access to advice for many, many Canadians, especially those with modest-sized accounts.”
A B.C.-based IIROC advisor had similar sentiments. “Fee-based accounts, in many cases, will only add costs to small clients, [and] remove them from the pool of clients who receive financial advice from competent advisors,” he wrote.
Morris says technology could fill the advice gap. “For lower-income clients, the solution lies in the rise of fintech and robo-advising. […] When we have robo advice, where we have somebody that’s available, perhaps not in person, but to chat with someone in person or online, I think that’s a very valid option.” For seniors who aren’t comfortable with robos, but can’t afford full-fledged advisors, she suggests they could work with salespeople who are clearly titled as such. “There’s where I wonder if our financial institutions can offer […] salespeople [who are] very clear about the role they’re playing,” she says.
Clients who like embedded commissions
The Ontario advisor also said his clients do not want to go fee-based.
“My practice is mostly funds and some stocks, with clients charged 0% for front load funds – [the] only way I employ the mutual funds I use: 0% switching costs; a modest trading fee for any stocks bought or sold,” he wrote. “They love it that way. I provide them full disclosure of fees they pay. I have offered to move many of them to fee-based and have yet to have one client opt out of the model I practice. Why? They do not want to write a cheque to me monthly for investment advice.”
Morris responds: “There’s no reason the amount couldn’t be debited from the account, rather than a cheque,” she says. “To the people who prefer the ease and the facility of embedded fees — we need to do what’s going to protect people. In order to protect from the abuses that are clearly out there, we need to accept this model, and with any change there is pushback, but I do think it’s the right thing to do.”
Read: More CRM2 myths busted
For those who disagree with Morris, the comment period on embedded commissions ends June 9, 2017.
Other poll notes
Over 1,900 members responded to CARP’s financial services survey, including members from every province and territory except Nunavut. The poll was conducted by CARP online and developed in consultation with survey research firm Bastet Strategy. It was open to members between March 10 and 29. CARP does not weight responses to align demographically with its member base, so results cannot be extrapolated to represent the views of CARP membership; only the views of members who responded are represented.