CSA Cost disclosure and performance reporting update, part 3: the costs and benefits of advice!

To presume that the proposals as they stand will lead to a “deepened advisory relationship” is chilling!

While I support the commitment to making sure advisor remuneration is clearly detailed in client reporting, the proposals themselves are incomplete with respect to what should be the main thrust of such regulation: that is to provide investors with clarity over the costs and benefits of the services they pay for and receive.

The CSA are only going half way, and half way may just as well be in the middle of no where.   Without proper benchmarking of return it is impossible to assess whether an advisor is adding to or detracting from value, or indeed, managing or increasing exposure to risk. 

Many of the comments in the proposals reveal the CSA’s willing ignorance in these matters:

Some regulators in other countries are moving to ban compensation models such as those involving trailing commissions altogether. We are not proposing to do so. We believe different dealer compensation models can offer benefits to investors.

Without proper benchmarking of returns and hence risks, it is virtually impossible for the investor to assess the costs of advice, and hence to value and measure the benefits. The rationale for dismissing “the banning of the commission model” is worryingly light.   Neither the compensation models nor the minimum standards that accompany them can really add value.

The industry says that there is value in that advice. We agree that advice is valuable. It is our belief that, if implemented, this proposal will help investors understand and assess the costs and benefits of the advice they receive and in so doing, become more informed consumers of that advice. The industry in turn, will benefit from a deepened advisory relationship with its clients.

There is of course value in good advice, but the current definition of advice within the advisory segment of the market place is one which is very narrowly defined and regulated, and certainly not as accountable or as client focussed as many investors would believe.  

Advice is limited to the suitability of the product within a narrow parameter to parameter framework, which is no more than a simple mechanism designed to match products with client profiles.  The vast majority of these products add little competitive value and the CSAs proposals continue to allow the real value equation for most of these services to be obscured from view. 

A cash based benchmark will never serve as a judge of the risk or the return of the wealth management solutions provided by the industry.   As I have said many times, what we are seeing is the implementation of tighter regulation of the transaction without making the true nature of the advisory relationship known to the investor.   The investor is not aware of the choices they are making.

We need to upgrade regulation to deal with services that are essentially being sold as “best interest advice based” but without the accountability and responsibility. 

Regulators either need to be  upfront and make it clear to clients just what the relationship and responsibilities are, so they can decide the level of discretion they want to retain or delegate, or change the way the industry is regulated.  But neither is being done effectively.

To presume that the proposals as they stand will lead to a “deepened advisory relationship” is chilling!  

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