The Nature Of Compensation Materially Affects Investor Outcomes
A report from the Ontario Securities Commission released last week states that:
"Evidence from academic research is sufficient to form several clear conclusions about investor impacts of compensation":
1) Funds that pay commission underperform: Returns are lower than funds that don't pay commission, whether looking at raw, risk-adjusted or after-fee returns.
2) Mutual fund distribution costs raise expenses and lower investment returns.
3) Advisors push investors into riskier funds.
4) Investors cannot easily assess what form of compensation is best for them and readily make sub-optimal choices.
More here:
Academic research also shows several important facets of advisor behaviour related to compensation:
1) Compensation influences the flow of money into mutual funds. Higher embedded commissions stimulate sales.
2) Advisor recommendations are sometimes based in favour of alternatives that generate more commission for the advisor.
Need I go on?
In essence, most advisors are looking out for one thing: their compensation.
That is a grave conflict of interest.
Investors should be able to trust that the priority (of any investment and wealth management advice) should be to find the best possible risk-adjusted returns in keeping with their goals and level of risk tolerance.
Fees and costs should be completely transparent.
Fiduciary duty should be upheld to offer absolutely no conflict of interest.
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