Sales incentives of this kind are undesirable as they encourage advisors and brokers to oversell high-fee products and promote unnecessary switching. Neither serves your interest. The compound value of commission is far in excess of the value of the service provided, and is a leading cause of poor investor returns. The underlying conflict of interest exacerbates the poor outcomes.
The UK banned commissioned-based advice and moved to a fee-based model in 2013. In the US there is an ongoing shift from a commission to a fee-based model, which is now favoured by some 70% of advisors.
Once the ban is effective locally, your advisor will have to act as a consultant, not as a broker. You will pay them for the advice they provide, not the products they sell, with the fee reflecting the time, effort and skill applied.
The proposed ban does not preclude that your advisor is still paid by the asset manager from your investment; it simply means that the fee is paid at your instruction and discretion, at a realistic level, and irrespective of the product you choose.
How will this model benefit you?
More insightful advice. Banning commissions should improve the quality and relevance of advice you receive. Speaking at a recent industry event, Vanguard CEO Bill McNabb described how the fee model has changed the advisor’s focus in the US. Instead of offering a list of the best stocks or funds to buy, they have pivoted towards an asset allocation model, recommending portfolios that are well balanced, diversified and in line with their clients’ long-term goals. Total costs have become an important consideration, and they accordingly now steer clients towards low-cost funds to enhance returns.
Less complexity. The excessive choice available today (1,500 unit trusts and counting) serves your advisor much more than you. This would become redundant once the fee model changed and asset managers focused on your needs rather than your advisor’s. The likely outcome: fewer and simpler options, making it easier for you to choose. To wit, in the US, the number of actively managed U.S. equity or stock funds fell from 4,351 to 2,223 between 2007 and 2016.
More appropriate products. You are likely to choose products based on the evidence (as to what works) rather than the industry’s emotional marketing. Providers will have to offer products that stand up to this scrutiny. McNabb notes that advisors’ emphasis on asset allocation and low-cost funds has been the biggest driver of indexing in the US, much more that any academic research or marketing.
Increased transparency. Evidence-based investing requires ready access to information, to evaluate and compare alternatives. You are more likely to invest with a provider who is transparent about their investment style, return prospects and the fee impact than one who is not. To facilitate fair and ready price comparisons, the industry will have to standardise its disclosure of charges.
Lower fees. On becoming a more informed investor, you are likely to focus on fees as this is the most predictable element of your future return. This increased awareness of the long-term fee impact should increase price competition, making fund management less profitable. The flip side: more retirement income for you.
Clearing the way for DIY investing
The commission ban promises to create a positive feedback loop: by eliminating commission-driven advice, the industry will have to come up with a simpler business model that obviates the need for advice. This is good news for you, the investor. You will be able to make more informed decisions, find more suitable products and save on both advice and investment fees.
Paying directly for advice will focus your mind on the value received; you may well decide to use online tools and products to educate yourself and invest direct.
Users have embraced such technology in virtually all spheres of their life, and it is inevitable that it will eventually also extend to investing. Younger people especially will be comfortable with simple, direct-to-consumer investment platforms. The better ones will offer tools that allow you to consider different fees, investment styles, portfolios and market conditions, to assess the impact on your savings outcome.
If these platforms integrate reliable, low cost products and come without the paper war that usually accompanies the sale of financial products, then so much the better. 10X for one offers such a DIY solution.
Conclusion
The proposed commission should make investing easier and cheaper, with advisors more likely to recommend products that improve your savings outcome rather than the industry’s fee income. A combination of factors, including a simpler and more transparent environment, fee-based advice and customer-friendly technology will encourage you to make your own decisions, using the tools and products available online. By cutting out the middle-man and investing in more appropriate products, you are likely to give your retirement income a big boost.
