If you get rid of commissions will the cost of advice really skyrocket? Will smaller investors be left out in the cold?

What would you rather do, create an environment which will address the key issues of our day, or retain one that ignores them?

Ask an industry representative about getting rid of commissions and they will talk to you about the alienation of the small investor; “smaller investors will no longer be able to access advice”, they say,” in other countries x% of advisors have already left the industry and millions of people can no longer get advice”.  I of course refer to a recent National Post Comment article by Greg Pollock titled “Ban commissions on mutual funds, decrease access

What are they really saying?   They are saying that if you get rid of the commission and the advisor is forced to justify a service for the fee then you will lose direct and unconstrained access to the sale of products.  This is true!

But, as you lose the sale, you gain access to the provision of advice that is more likely to be in your own best interests.   That is for those advisors who take an interest in your best interests.  I can see why many who only wish to flog products and transact would wish to leave.  But should we really mourn their departure and should we really be concerned with their well being? 

Naturally, we will have a void which needs to be filled if they do depart: it is cheaper to sell than to advise and those who do not wish to advise will leave. 

Advisors who are interested in your best interests will still be here to serve your needs when commissions are no longer available, and those same advisors who were willing to spend time with you for your commission return and provide advice would still be willing to offer you advice at the same rate.  Indeed, those who were already providing advice, should find no real difference because they should have already matched the costs of their service with the returns.

The definition of advice though is key.  When an industry rep is talking about advice, they may really be talking about a transaction recommendation.  Sadly this is not advice, since advice in the investment world should just as likely involve telling you not to invest, or pay down your mortgage, or buy a low cost indexed fund instead of a high cost closet index hugging fund, or spend some time actually structuring a portfolio that can manage risk and better meet your needs than some high cost, illiquid product that you may well be forced to dump some time down the road.  

Yes, getting rid of commissions may force advisors to up the ante and spend more time structuring, planning and managing your assets around your financial needs than they would have spent on the transaction.  It may well increase the initial time and costs, because now you will be paying for advice, but the long term costs should be reduced, because a better planned strategy has fewer wrong turns and better thought out structures.  Additionally, with the machine focussed on advice as opposed to the transaction, we are more likely to see innovation that will reduce costs and increase the sophistication of the outcome and the ultimate value the investor receives.  In the long run a transaction focussed process is inefficient and conflicted and, by virtue of this, more expensive.

But you know for the smaller investor, who can actually ill afford the costs of advice and would no longer be able to be flogged the transaction, it will force the industry to come up with lower cost, best interest, financial solutions.   Smaller investors will likely initially lose access to the product sale but not because the commission structure was a good thing, but because the commission structure allowed advisors to sell products without attention to best interests advice. 

Smaller investors need access to advice, but they also need access to advice that is appropriate to their needs and be cost effective, and the current transaction return regime offers neither.  

Efficient service structures with various levels of advisor/investor interaction can easily be developed to allow smaller investors to gain access to cost effective and appropriate investment advice.  

What would you rather do, create an environment which will address the key issues of our day, or retain one that ignores them?  Smaller investors will ultimately be best served by a move to a transaction return free environment.

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