CFA Institute Calls for Greater Transparency on Commission Structures to Tackle Mis-Selling and empower investors

A new study which examines the consequences of a ban on sales inducements - commissions received by advisers selling investment products - across global financial markets suggests that greater transparency in a form which is useful to investors is needed. Complete and comparable disclosure around fees and conflicts of interest would support more informed decision making, and contribute to the restoration of trust in advisers. 

The study, Restricting Sales Inducements: Perspectives on the Availability and Quality of Financial Advice for Individual Investors, explores the efforts that global regulators and policy-makers have undertaken to improve the quality of financial advice for investors. It also considers the solutions that regulators have proposed to address mis-selling, and explores future scenarios for business models for the industry.

The study reveals insight from CFA Institute members on the potential solutions to reduce the risk of mis-selling—from increased transparency to outright bans on inducements—as well as their views on what the future of finance may look like as a result from the implementation of each choice. Key findings from the survey include:

• The main cause of mis-selling, according to 70% of survey respondents, is inappropriate remuneration structures biased towards volume sales or specific products
• The three most popular solutions to mis-selling that do not involve inducement bans are:
  1. Introducing clear standards for cost disclosures 
  2. Revising commission structures to eliminate those that encourage volume sales (tiered commissions) 
  3. Setting equal commission levels (as a percentage of the management fee) for all products in the same category

In addition, one concern raised in markets where the decision has been taken to ban inducements is a fear that such a move risks stratifying the investing public into the few that can afford investment advice, versus those who cannot afford, or are averse, to pay up-front for advice. Larger financial institutions appear to be moving away from providing advisory services to smaller clients because of a lack of economic incentive to serve them. According to 46% of survey respondents, the main consequence of banning commissions is that distributors will continue to offer advice, but will shrink the product offerings to those they continue to receive fees upon. 

Matt Orsagh, CFA, Director of Capital Markets Policy, at CFA Institute, commented:

"Transparency should be part of any solution aimed at addressing mis-selling because simplified disclosures would give investors the information they need to make informed decisions. It is also important to pursue uniformity in fee disclosures across jurisdictions to allow comparability of fees across markets, especially in the EU, where manufacturers can sell investment products across borders. Our survey results indicate that CFA Institute members believe a ban on commissions will result in an investment landscape with less choice for investors and a market that underserves, or does not serve, smaller clients.”