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Banning Commissions Won’t Stop Mis-selling: Study

February 20, 2014

Investors around the world underestimate how much they pay in commissions, according to the CFA Institute — one reason that they prefer commissions to advice fees. In a new report based on interviews with thousands of its members around the world, the institute recommends improving transparency regarding commissions and removing conflicts of interest from distributors’ pay structures.

Inappropriate product sales topped the list of ethical issues troubling participants in the study, which took place in late 2013.

A majority favor increased transparency, in the form of simplified disclosures that explain all services and fees to investors as well as exact amounts collected by all parties — advisors, distributors and anyone else. Meanwhile, eliminating tiered commission payments could reduce improper incentives for advisors to close large-volume sales. And setting equal commission levels for all products in a given category could minimize conflicts of interest, the institute found.

Only 15% of survey participants thought banning commissions completely would work, and many think a total ban would carry unintended consequences. Fewer advisory firms would serve small clients; investors would have fewer product choices; competition among advisors would drop as practitioners flee a less lucrative industry; middle-market retail investors would have fewer options for quality advice; and low-cost services would proliferate, providing mere market intelligence and trade execution.

Furthermore, the institute points out, even the most thorough and straightforward disclosure of commissions wouldn’t keep investors from buying products they don’t understand. And regulations already in place in certain markets have failed to deter all advisors from misleading clients about fees, the report found.

Although there’s no silver bullet for inappropriate product sales, Matt Orsagh, director of capital markets policy at the CFA Institute, recently blogged: “We also encourage financial advisors to invest in consistent and quality advisor training focused on fulfilling the needs of the client so that advisors can better understand their clients’ goals and choose better products to help them reach those goals.” The CFA certification was likely not far from Orsagh’s mind.

By Chris Latham