There is a very interesting debate (actually it’s gone beyond debate at this point) going on south of the border right now about whether or not the US Department of Labor should impose a fiduciary rule on brokers who work with retirement accounts. A fiduciary is required to put the interests of their clients ahead of their own. As posed in a Bloomberg online piece yesterday (About Those Hidden Fees Investors Pay) “What could be simpler or less objectionable?”
Would investors want service providers who adhere to a fiduciary standard? Why not? Would services providers want to be held to a fiduciary standard if they knew that’s what investors wanted? Of course they would….unless, of course, their entire business proposition is based on something that is not in the best interest of their clients. The standard arguments against a fiduciary rule usually envision a new world where a whole swath of investors wouldn’t have access to the advice they need or that the cost of advice will skyrocket due to a greater duty of care imposed by new rules. While both these arguments are often criticized as hollow and self serving to those who make them, experience from a similar transition in the UK suggests that those two outcomes are certainly plausible, at least perhaps as a part of a transition.
The challenge generally with imposing specific rules or regulatory constraints is that there are always unforeseen and unintended consequences. In this case the regulators see a conflict of interest that is damaging to consumers so they are trying to confront the conflict head on. The problem, in reality, is not the conflict of interest. The conflict of interest is a symptom of a greater problem. The greater problem is informational and educational asymmetry – add to that fear and greed (which enter the picture anytime money is involved) and you get the potential for damaging conflict of interest. Imposing a fiduciary rule tackles the conflict of interest symptom without properly addressing the underlying issue so ultimately it won’t work.
Increased investor education and transparency about things like fees, commissions and risks will go much further towards addressing the underlying problems. With transparency and education, investors are in a much better position to decide for themselves whether what is being offered (sold) to them is in their best interest. In a fully transparent market, conflict of interest is actually a good thing – it’s the foundation of an efficient market place and ultimately leads to true price discovery. In environments with hidden fees and differences in basic financial knowledge, the efficiency breaks down rapidly and those willing to not act as fiduciaries can thrive.
The US has traditionally relied more on competition than regulation to help the investment industry evolve. For example, we’ve always admired the growth of low-cost investment options in the US, driven initially by index mutual fund providers like Vanguard, low cost brokers like Charles Schwab and more recently with the explosion of independent fee-based investment services and robo-advisors. Again, this growth and availability of choice for US investors has been driven by competition, not regulation. The UK and other countries such as Australia felt transparency and competition wasn’t enough so stepped in with heavier-handed regulation, some of which has had unintended consequences.
Canada is currently in the process of finalizing it’s approach and so far it looks like a little of both. As it stands now, very few of those approved to give investment advice in Canada are required to act as a fiduciary. By mandating increased transparency around investment industry compensation and performance, our securities regulators are hoping people will be better positioned to make their own decisions about who they trust for advice. Will these steps help? Will we ultimately rely on regulation or competition to drive the best outcome for Canadian investors? The answer will likely resemble something in between the UK and US approach; much like our spelling and sense of humour – not quite distinct, but distinctly Canadian.