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New investment disclosure rules – what did you think was going to happen?

September 3, 2014

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Posted by: glenn

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Category: Life Insurance

Much to the glee of fee-only planners and consumer advocates, the investment industry is being forced to start disclosing how much they’re making and how they’re charging consumers (see Roseman’s article in the Star. The idea is that disclosing these fees is going to start a trickle down effect that results in consumers getting more for their investment dollar.

In my opinion, it’s about 50-50 as to that being the real reason for this. The other half of the reason is simply a morbid curiousity as to how much other people are making (answer should be: none of your business).

I disagree. In the words of Tosh.O, what did you think was going to happen? (The comedian Tosh.O has a segment by that name where he shows people doing really obviously stupid things – with predictable results).

You’re forcing the banks and investment companies to disclose exactly how much you’re paying them. This will potentially be seen in a bad light by consumers. But stop for a second – are the banks and investment companies going to sit idly by? Or are they going to start aggressively making up for any lost revenue?

Before we look at how banks might react, lets look at a contrarian viewpoint about this change.

First, looking at someone’s income with no regard to costs is clearly nonsensical. Yet how many people (including the proponents of this change) have any idea of the costs associated with offering investment advice? I’ve an incidental understanding – I know the costs and time associated with simply offering investment advice is overwhelming. Compliance is beyond burdensome. Every change in investments must be documented, reviewed, and justified in writing. Then it must all be documented, reviewed and justified by more people, all the way up the line. The hours involved in this alone are the reason we don’t offer investment advice here at Life Insurance Canada.com.

And yes, consumers don’t understand the costs in the model. All they’ll see are numbers lke $500 and decide the hour they spend with their advisor each year isn’t worth $500. Consumer have no concept or understanding of the costs involved in offering investment advice.

Secondly, since when does someone else’s income become your business? I’d always understood that delving into someone’s income was rude – plainly put.

In what other line of business that involve commissioned sales do consumers *start* with negotiating commission? Do you start your computer purchase at Future Shop with a request for the sales associate’s commission schedule, so that you can work them down? Do you lead your car purchases with ‘how much of this is your commission’? Of course not.

The problem that’s purportedly being solved can already be solved by consumer diligence. If fees are affecting your investments, ask and shop around. There’s plenty of options already available.

But lets dismiss all my comments – lets proceed forward. I’ll ask again, what did you think was going to happen.

Boomer and Echo, a fee-based financial planning firm just did an article on some changes made by the banks and investment companies. The article beats up on the investment industry pretty hard and shows treatment of a small investor – they basically got turned away by their advisor as being too small.

Think about that for a second – because that’s where we’re about to go. If banks and advisors have to justify every dollar they make, smaller accounts are going to be the worst headaches. There will be ongoing struggles trying to explain $500 fees on a $10,000 RRSP – and it’s going to very soon not be worth the effort. Expect the bank and advisor community to react in their own best interests, and get rid of any smaller accounts.

The impact of that? Only high end large net-worth investors will have access to investment advice. If you’re starting out or don’t have much in the way of investments, you’re going to be on your own – expect your options to be extremely limited. And if every time you perform service work the bank is going to have to rejustify their fees, expect to receive minimal or no service on the few paltry options you do have.

In the end? Little to no options, little to no competition for the average smaller investor who’s no longer worth the effort. The few options they will have, expect them to be severerly restricted in terms of service.

The banks will protect their own best interests before consumers. What did you think was going to happen?

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