CSA Best Interests and Mutual Fund fees discussion: further comments on competitive advice based financial services markets!

A transaction driven model is hopelessly market inefficient resulting in uncompetitive market outcomes and sub optimal consumption, production, savings and investment decisions economy wide. We can only have a competitive market place for retail financial services by removing transaction remuneration and adding statutory best interest standards.

In a competitive market the buyer’s demand curve and the supplier’s supply curve should intersect. The demand and supply curve should hold all the relevant information about a buyer’s and supplier’s preferences. Where the two intersect is determined by the price.

Price is actually very important, but it is the information behind the price, that sets it, that is key.   Unfortunately, the market for securities and retail financial services products is beset with asymmetric information, and, as such, market failure.

To avoid the problem of asymmetric information investors use an advisor.  The advisor should have a more efficiently constructed demand curve(s). The idea is to use advisors’ demand curves to set prices and market supply.

But if the advisor is conflicted and does not have to act in their client’s best interests, this demand curve will also likely reflect transaction remuneration, also resulting in market failure.

The other problem is that there are really two prices here, only one of which is set and set inefficiently:

The first is the price for the transaction.  The second, because investment is a complex subject matter, is the price for the advice for construction, planning and management.

Investors do not just lack the knowledge to select transactions, but they also lack the subject matter expertise to construct plan and manage their assets.   You can only determine product and security selection once you have the portfolio framework in place.  This is key to setting the “investor demand curve” for securities.

In a transaction based service with transaction remuneration there is no service demand and supply curve to set prices.  The service option is not priced. It is referenced/estimated/benchmarked to the transaction return. 

But we need a price for the service and service options so the market can develop. We need a service supply and demand curve, and we can only do this by charging fees for service and allowing the market to properly define service and calibrate service supply and service options. 

At the moment we have market failure in virtually every sphere of the Canadian retail financial services market place.   The transaction, the product development and management, and service demand and supply.

Best interests standards would put into the market place a demand curve that the advisor assesses would best reflect the client’s demand curve, a demand curve driven by the client’s suitability framework.  Best interests standards would also help ensure that the service supply curve is constructed in accordance with investor needs and not advisor (service supplier) interests.

Demand and supply of products and securities would no longer be impacted by transaction return, making this market much more sensitive to economic fundamentals and much more efficient, not just in terms of pricing but in supply side dynamics impacting consumption, production, savings and investment.

Note that under a fee for service option, advisors would add value by driving down not just transaction costs but product development and management costs.  Fee for service covers a) well defined services and b) the ability to add value via those services.   At the moment the development of the retail financial services market place has been held back because of market failure and a failure to properly define and price service

In other words we can only have a competitive market place for retail financial services by removing transaction remuneration and adding statutory best interest standards.  We can only properly define the investor demand curve for securities via a well structured, non conflicted, suitability framework, which is a service driven structure.  


Andrew Teasdale, CFA

Leave a Reply