The UK Financial Services Authority plans to make big changes to the way that investment advisors are paid starting in 2012. They plan to make any fees charged to investors much more transparent. The blog Where Does All My Money Go reported the changes as so surprising that they seem like an April Fool’s joke. (Full text of the discussion paper is available here).
Currently, investors as a group know little about how their advisors get paid. This is true in the UK as well as Canada and the US. In fact, many investors think that they don’t pay anything to their advisors.
The truth is that managers of financial products, such as mutual funds, offer commissions to advisors as an incentive to recommend their products. These commissions are paid from investors’ money, but most investors have little idea how much they are paying for their investment advice.
The changes coming in the UK promise to make the system much more transparent. Fees are to be negotiated between investors and advisors, and managers of financial products won’t be able to offer incentives to advisors. It will still be possible to have advisor fees paid out of invested funds, but the goal is to make investors aware of how much they are paying.
There is still plenty of time for the UK investment industry to fight these changes or water them down. We’ll have to wait and see how these changes get implemented.
Similar changes would be good for investors in Canada. Under the current system, an investor who invests $100,000 in mutual funds might pay a $5000 commission up front and $500 in trailers each year. Many investors would balk if they knew how much they were paying. Transparency of fees would lead to a huge shakeup in the investment advisor industry.