On Saturday, the Money Saver Magazine has presentations filling the whole day. The second one was called "Upcoming Regulatory Reforms and How They Affect You". This presentation was done by John DeGoey. The regulatory reform talked about is for Financial Advisors.
John DeGoey has a web site. He wrote a book called The Professional Financial Advisor and version III is now out. He is in the top 50 Wealth Professional Advisor 2014. John DeGoey is also on Twitter.
Science testing and necessary disclosure underpins professionalism. You should read the books on Freakonomics. See the website here. People respond to incentives, however, some responses can be perverse and not in the best interest of clients.
The OSC (Ontario Securities Commission) has a fair dealing Model (FDM). The idea was to disclose cost and conflicts that are both real and perceived when giving financial advice. The OSC turn the FDM over the Canadian Securities Administration and now it is called Client Relationship Model (CRM).
CRM I, introduced in March 2012 was viewed as a nuisance (extra paperwork), but did not change anything. Old clients were asked risk level for each account. Products might be invested for the long term but could be deemed speculation. This was just simple risk assessment.
There is now a CRM II model. New disclosure includes pre-trade commission disclosure and the use of Fund Facts to replace the prospectus.
Other places are more aggressive in rules for Financial Advisors, like UK and Australia where they banned embeded commissions. Some jurisdictions are improving fiduciary standards for all advisors. They are also moving to increase the proficiency requirements of all advisors.
In 2015 there will be changes in how market valuations are calculated. The client statements are to include positions and book value in a consistent way. In 2016 there will be client specific account performance rating for 1, 3, 5 and 10 years and since inception. There will be full compensation disclosure from advisor, dealer and fund companies.
For after 2016, "this is what I think will happen and this is what I would like to see". We can learn from what UK and Australia did. After reform in the UK, the advisor population dropped 25% due to higher proficiency standards and removal of embedded commission. Married people are happier than single people, but correlation is not causation.
Do we in Canada need to raise proficiency? Yes. What will happen to small investors (investor with less than $100K)? There should be no change. If client is viable under the old rules they should be viable under the new rules. However, investors with little money may use Robo Advisors.
Is product cost consideration? Will it be? People with high cost products now may move to low cost products. Is current advisor population low, high or about right? We could get rid of one third of our advisors.
Do clients understand how much advisors are paid? Will improved transparencies help? Does disclosure help investors? The answer is ABC, Alpha, Beta and Cost. Alpha will beat the market and Beta will match the market. Option A is to statistically replicate the market and charge a 0.5% fee. This is Beta. Options B is for an active management and 1.5% fee. We should be moving to low cost products.
William F. Sharpe says if you measure actively managed and passively managed funds, the performance will be the same. They have to be. Cost and performance are negatively correlated. Past performance is no a reliable indicator of future performance.
Mark Carhart says that past results does not inform future results as far as mutual funds are concerned. Books on best performing funds make no sense. A mutual fund may beat their benchmark over 5 years, but the chances of beating their benchmark over 50 years is 1%.
Does disclosure level the playing field regarding knowledge asymmetries or would an outright ban be more appropriate in regards to commissions? He thinks a ban is the way to go. Otherwise it can lead to the panhandle effect. People say fine you are up front about commissions and go with high commission products.
Fund managers are overconfidence. Over 21 years of asking fund managers if they are above average, average or below average fund manager. None says below average, but statistically 50% are before their fees. We cannot be all above average. Only a fraction is. Something like 10% of all actively managed funds has a long term (10 years) track record that beats the benchmark.
It is highly unlikely you can beat the market. All facts are disclosed. All personal opinions should be claimed as such. You should read books by Belsky and Gilovich, Cadsby, Thaler, Statman, Shefrin, and Taleb.
He thinks we should move to eliminate embedded commissions and more to a fiduciary standard. Ontario may be the second province to regulate financial planning after Quebec. You can find a basic PDF presentation from John DeGoey here.
On my other blog I am today writing about CCL Industries Inc. (TSX-CCL.B, OTC-CCDBF) ... continue ...
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
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