Who Should Have a Fiduciary Obligation in Investment Management?

The financial services industry in North America has long had an image problem when it comes to financial advice offered to retail clients. Confusion among investors to the role their advisors play as it pertains to product recommendations has not helped alleviate concerns around mistrust and whether these financial professionals ultimately have the best interests of their clients in mind. Unfortunately, there hasn’t been any progress on implementing a universal fiduciary standard for all advisors in Canada and given a proposal from the Canadian Securities Administrators was abolished last year, it doesn’t appear that one is on the horizon. While this article from the Wall Street Journal discusses how the confusion around whether advisors have a fiduciary obligation or are merely salespeople can lead to suboptimal investment decisions for the end client, you can see parallels in the Canadian investment landscape. The article discusses the differences between 401(k) and 403(b) plans in the United States, with the latter not requiring administrators to uphold a fiduciary standard. The worrisome issue for teachers that hold 403(b) plans is that, according to securities regulators, 403(b) plans are more likely to have higher-cost investment products. Because of the effects associated with compounding, higher-fee products can severely detract from investment returns and negatively affect the terminal value of a portfolio. As the article states, for a portfolio “invested for 25 years at 6%, an extra 2 percentage points in fees would cut 38% from the final account value.” Before assuming a difference of two percent in annual investment management fees is unrealistic, the annuities that many 403(b) plans hold can charge up to three percent in annual investment management fees. While it is clear that a universal fiduciary standard would help tackle the issues around high-cost products being recommended to retail investors, the industry could additionally focus on how plan administration is structured. Given school districts can retain plan administrators to help employees and teachers choose investments without directly compensating the plan administrator, the underlying structure is inherently one which increases the potential for conflict. Compensation for plan administrators being derived by the firms providing the financial products is a backwards approach, and individuals should be aware of where and how the plan administrators derive their revenue. One solution would be for school districts to directly compensate the plan administration and retain their services as unbiased financial advice where no additional compensation is received from the manufacturers of investment product. That starting point could be a step in the right direction.