Early January of each year many people come up with their predictions for the year. This year, I am publicly announcing mine: 2015 will be a great year for Canadian investors.
This is not a prediction of great investment returns, but of fundamental improvements in the industry that will have long-term benefits for almost all Canadians. For years, average Canadians have paid one of the highest fees amongst developed countries for ubiquitous investment products such as mutual funds. Moreover, the industry has long suffered from obvious and problematic conflicts of interest; and lack of transparency.
The very structure of mutual fund advisors’ compensation creates major conflicts of interests. Most advisors get compensated solely from commissions they receive from the funds they sell. This system incentivizes advisors to sell funds that pay higher commissions. These funds are expensive and are often not the best choice for clients.
The problem is exacerbated by lack of transparency. When you deal with a used car salesman, chances are you know they are on commission. Since you know what you are dealing with, you adjust your expectations and interactions accordingly. But if you are not even aware of the fact that your advisor’s interests are not aligned with yours, you have no reason to be skeptical of their recommendations or question their motivation.
This lack of transparency has served established players in the industry well. Every year, billions of dollars are syphoned out of investors’ pockets and into the pockets of mutual fund dealers and fund companies without the investors’ knowledge. If you invest in mutual funds, I encourage you to try to determine the fees you paid in 2014 by looking at your statements. My bet is you won’t succeed.
The good news is that the days of conflicts of interest, high fees, and lack of transparency are numbered. Entrepreneurs across the country are taking it upon themselves to drive the industry forward. A few startup investment managers that promise complete transparency, unbiased advice, and reasonable fees launched in 2014. These companies mostly rely on modern technologies to service their clients in order to keep the cost of advice low and be accessible to a wide range of clients, including ones with small accounts. For this reason they have become known as “robo-advisors” in the media (a name that I am not a personally a fan of – but that is perhaps the topic of another post).
This new category has already seen some traction in the market. I expect 2015 will be the pivotal year in which adoption of these and similar services will gather pace. As the public becomes more familiar with these options and their advantages, they will start walking away from the flawed practices of mutual fund companies. The ball will then be in the incumbents’ court. They can either join the revolution, and adopt the principles of unbiased advice, transparency, and reasonable fees, or go the way of dinosaurs.
