Is it really all about transparency?

The following is a quote taken from a recent Preet Banerjee article from the online Money Sense.ca website.

“But it should be noted that advisers can achieve transparency in a commission model simply by being transparent. If they take the time to break down the costs and embedded compensation that commissioned products carry, they fulfill the ultimate expectation of consumer advocates: providing investors with informed choice.”

Unfortunately this is about as far from the ultimate expectation of consumer advocates as the earth is from the centre of the Milky Way, and Preet’s logic is as about as mind boggling as the inestimable distance between the two.

Investor advocates would like to see best interests/fiduciary type standards governing all advice based relationships and would like to see the removal of factors that create conflicts of interests between the advisor’s and the investor’s goals.  The most predominant factor impacting conflicts of interest is that of embedded transaction compensation.

But, it is also more than just this.   We have a transaction based industry with very low standards governing what is and what is not a suitable investment.   At the same time as exactingly low standards for advisors, we have very high levels of investor responsibility for processes over which the vast majority are incapable of understanding.

Yes, amidst all this mayhem there is an opaqueness that would mystify the Gods of Olympus: lack of transparency over the real relationship, over the extent and accountability of services, of regulation and responsibility, of investment risk and return and product complexity, etc, etc, etc.   Amidst all these low standards anything goes.

Disclosing costs and embedded commission leaves the train at the station and no closer to its destination.  Yes, informed choice is important and taking away transaction based remuneration and introducing best interests standards would force advisors to compete on service and service content, and to differentiate themselves in terms of scope, sophistication and cost. 

The universe of issues that comprise the wish list of investor advocates is complex to some degree, but simple in others.   Bring forward best interests standards, get rid of transaction remuneration for advice based services, improve technical standards and professionalism and create a more competitive market place for advice based services that would run the gamut from low cost passive indexed to complex personalised service.

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