A global shift towards fee-based advice

By Marjo Johne

As Canada continues to move towards fee-based advice, advisers and investors may want to look at how a similar trend has affected their counterparts in other sections of the globe.

In the United Kingdom, the Retail Distribution Review (RDR) introduced in December 2012 eliminated commission payments from fund companies, raised the qualification levels for advisers and mandated full and clear disclosure of how advisers charge for their services. In Australia, Future of Financial Advice (FoFA) reforms banned commissions and conflicted remuneration structures, while in the Netherlands commissions are disallowed not only from investment products but also from mortgage loans.

South of the border, adviser compensation based on client-funded fees has been the norm for years. 

“We’re starting to see a global trend among regulators that maybe fee-based advice is the way to go,” says Nick Blake, head of distribution for Europe and the U.K., at Vanguard Asset Management, part of The Vanguard Group, Inc., in Valley Forge, Pa. “Asian countries are now also starting to look at this model.”

The move towards fee-based advice and stricter rules around qualifications and transparency has led largely to positive outcomes for advisers and investors in North America and beyond. A number of recent studies have shown investors realize better returns when their advisers or brokers are not paid transaction-based commissions.

At least one study, by Toronto-based wealth management software provider PriceMetrix Inc., found advisers were also beneficiaries of the fee-based model, gaining revenue growth of almost 50 per cent over three years after adding fee-based accounts to their books

In the U.K, the implementation of RDR has led to reduced investing costs and increased discounting. A review released last year by the Financial Conduct Authority – the U.K. regulatory body that implemented RDR – also points to reduced product bias on the adviser’s part as a result of the new rules.

“We are starting to see the benefits of RDR emerge, even though it’s not been easy for many,” says Blake. “There were concerns initially that RDR would kill off half the industry, and indeed the numbers dipped not because people were leaving the industry but rather because advisers were studying and taking exams. Today, 96 per cent of advisers in the U.K. hold the professional qualifications they need to have to be a highly qualified adviser.”

While the U.K. saw about 5,000 financial advisers leave the banks that employed them, many of these advisers resurfaced in regional advice firms, says Mr. Blake.

“What we’re seeing now are advisers redefining their value proposition,” he says. “The majority of advice that used to be delivered pre-RDR was very centred around the investment product. Now advisers are spending more time on risk-assessment, asset allocation, tax planning and inter-generational planning – services that add value and strengthen the adviser-client relationship.”

Another notable effect of the move towards fee-based, no-commission advice? More advisers and investors are embracing exchange-traded funds, which now account for close to US$2.8-trillion in global assets invested in 5,580 ETFs.

Jason McIntyre, head of sales at Vanguard Canada, says the ongoing shift towards a more transparent investment industry has made both advisers and investors more keenly aware of portfolio costs. Canadian investors, in particular, are looking more closely at items such as management expense ratios and opting for investment products with lower fees. Many advisers are responding to this trend by focusing their practice on ETFs.

“With increased transparency, investors tend to be driven towards a lower-fee model – such as ETFs – because the numbers are staring them right in the face,” says Mr. McIntyre. 

Mr. Blake notes that access to ETFs in the U.K. was limited prior to the roll-out of RDR, but now ETFs get equal billing as other products on the region’s investment platforms. 

“Now we’re really seeing sales of ETFs accelerate,” he says. “For investors and advisers, this means more options for low-cost investing.”

To learn more about Vanguard ETFs, visit www.vanguardcanada.ca/individual/etfs/etfs.htm.