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.

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Competitive markets and regulatory intervention–TD Bank Mutual Funds submission.

Transaction remuneration within an advice based market place results in 1) advice market failure, 2) transaction market failure, and 3) fund management market failure.

The TD Bank Financial Group argue that the market for mutual funds is already competitive and that further regulation will negatively impact competition.  It also asserts that if the perceived market failure is one of conflict of interest, then this is best dealt with by clear disclosure. 

It is my opinion that these arguments are severely flawed and that only a best interests standard free from transaction remuneration conflicts can lead to a competitive market outcome in all 3 key areas noted:

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Future Shock: “Tomorrow’s” Financial Services Industry

Below are some excerpts from a presentation I made in October 2000 regarding internet wealth management delivery systems.  Essentially these can either be used to deliver wealth management services or for private investors to run their own.  At the time I thought the evolution of systems and services would be much quicker, and this was in Europe which was a whole lot more advanced than Canada.  

I provide this information because it is relevant to the CSA consultations concerning mutual fund fees and best interests standards.  The industry in Canada needs to innovate and invest in the future if it is to escape its current antediluvian structures which are restricting change.   The arguments the industry are making with regard to the costs and accessibility of advice are erroneous.

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Failure to invest and innovate leaves industry unprepared for change–CSA Mutual fund discussion.

The mutual fund companies and the brokers and dealers of today should be thinking about the landscape, services and the systems of tomorrow. They are fighting to save the past, a way of life that was never as rosy as it is painted to be, when they should be innovating and investing in the wealth management platforms of the future, a place where all investors, large and small, can indeed access and benefit from good advice.

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If “I” wish to offer advice,“I” am in conflict with me, with you and with the system – CSA Mutual Fund Fees discussion paper!

If I am only paid by the transaction, then I should only wish to offer the transaction. I am not paid to offer advice that is in your best interests, although I may offer such “incidentally”. What may be in your best interests may be no transaction at all, and even considering such an option, is a waste of my time.

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Mutual fund fees (Canada)–perspective makes it all the more complex and pressing an issue..

“Over the last few years, there has been a wave of regulatory reforms and proposals in other major international jurisdictions that fundamentally change the way retail investors buy investment funds and other financial products, as well as how they pay for financial advice.”

I would have stressed that the changes made affect the way that individuals are advised and sold products by the industry, as opposed to the way investors buy products and pay for that transaction advice.

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