Few investors know how much they pay for advice from their financial adviser or planner.
Some might even assume it's free because they aren't directly handing over cash every time they meet. Yet most investors buying mutual funds sold by an adviser are paying for advice whether they know it or not.
And so they should. Good advice should come at a cost.
But the problem has always been figuring out just how much you're paying for advice.
That's all about to change over the next three years as new government regulations are phased in requiring investment firms to provide better disclosure about fees investors are paying on their funds -- as well as annual performance of those investments.
"What the regulators wanted... is to make sure the investor understands how much is being paid to the adviser," says Joanne De Laurentiis, president of the IFIC (Investment Funds Institute of Canada), representing the industry. "Now you'll have pretty good information to chat with your adviser if you were unhappy."
Although a step in the right direction, critics argue the measures don't go far enough.
Tom Bradley, president of the small, Vancouver-based mutual fund firm Steadyhand Investment Funds, says the central problem with the industry's fee structure -- trailer fees -- still hasn't been adequately addressed.
"It (a trailer fee) is embedded into the management expense ratio (MER) and it is generally about one per cent for equity and balanced funds," he says, adding the trailer fee is less for bond and money-market funds.
It's effectively a sales commission paid by many fund companies to compensate advisers for selling their funds.
Trailer fees make up the majority of compensation commissions (64 per cent in 2011, compared to 27 per cent in 1996) paid to advisers in Canada, states a recent report by the Canadian Securities Administrators (CSA), representing provincial and territorial securities regulators.
While trailer fees will be reported on statements annually under new regulations, Bradley says the industry should go a step further and ban them altogether.
"Whoever is dealing with the client -- a financial planner, broker or whatever -- let them charge for advice whatever he or she sees fit instead of someone at the marketing department of a fund company determining how that planner or adviser is going to get paid," says Bradley, whose fund company does not pay trailer fees.
Banning trailers would help avoid possible conflicts of interest where an adviser recommends one fund over another because it pays a higher trailer fee, he says.
Others critical of the industry argue present standards of conduct for investment advisers also need to be changed to protect the investing public from these kinds of conflicts of interest.
At the moment, advisers are held to a 'know your client' standard when providing advice.
While advisers can't recommend to little old ladies who fear losing their money they should invest in high-risk emerging market equity funds, the standard is less clear about other conflicts. Longtime investor advocate Joe Killoran says even though advisers can't sell a product that's unsuitable to their clients, they're still salespeople and not true advisers because they are not legally bound to provide advice that puts their clients' interests ahead of their own.
"They don't have the fiduciary oath."
De Laurentiis says licensed advisers are supposed to disclose potential conflicts. "In other words, if I'm being paid by the manager of the fund, I need to disclose that very clearly to you and say 'Here's what I'm being paid and who is paying me.' "
Regulations, however, only require advisers discuss with clients the MER and whether the funds have upfront costs and redemption penalties, but they aren't required to tell clients how much a fund firm is paying them in trailing commissions for selling a fund.
And many advisers -- more than 50 per cent in surveys -- do not discuss trailers with their clients, the CSA report found.
Killoran says holding financial advisers to a higher professional standard would help address this problem because they could face professional disciplinary or even legal action if they don't act in clients' best interests.
This higher standard already applies to some professions in the financial industry. Portfolio managers, which run the mutual funds, pension funds and the wealth of high-net-worth clients, do have a fiduciary duty to act in their clients' best interests.
That's largely because many of them have a certified financial analyst (CFA) designation, which includes a fiduciary duty to clients in its code of ethics.
In fact, the CFA institute -- the governing body for CFA charter-holders -- is now pushing for more than just its own profession to be held to this standard. Last month, it made it a top priority in a new campaign announced at its annual meeting aimed at restoring investor trust in the system.
"We believe anybody offering advice to people where people are entitled to believe that they're entering into a relationship of trust, they're owed that same standard of care, prudence and loyalty that a fiduciary would be held to," says John Rogers, president of the New York-based organization.
Canada's regulators are considering the idea for advisers, brokers and planners, but the industry argues it would make advisers' jobs too difficult and adequate protection is already in place, De Laurentiis says.
"It becomes more of an academic question about if you had a very strict legal duty to advise clients in their best interest, would it actually make a big difference?" she says, adding the United Kingdom and Australia have moved in this direction and encountered obstacles.
"What they've concluded is you can't really impose a strict best-interest duty because it legally ties everybody up to the point they can't do anything."
Furthermore, putting in place these measures may increase costs for some investors because investment firms would have higher expenses for enhanced training, reporting and compliance, the industry contends.
And it would most likely be the little guy who bears the brunt of the increases.
Yet this argument actually makes the case for greater transparency, Bradley says.
"It's basically saying that 'We've duped everybody and nobody knows what they're paying and that allows us to charge more to the larger clients than they should be paying so we can subsidize the smaller clients."
He says changing how advice is provided and compensated likely will increase costs slightly for the investor with $10,000 in funds paying $50 a year in fees for advice.
"But how do we ever expect the industry to change and evolve for the better if there's this subterfuge in place?"