{"id":364,"date":"2015-10-26T12:17:36","date_gmt":"2015-10-26T19:17:36","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=364"},"modified":"2015-10-26T12:17:36","modified_gmt":"2015-10-26T19:17:36","slug":"incentives-and-conflicts-of-interest-matter-more-evidence-for-canadian-investors","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/incentives-and-conflicts-of-interest-matter-more-evidence-for-canadian-investors\/","title":{"rendered":"Incentives and conflicts of interest matter &#8211;  more evidence for Canadian investors"},"content":{"rendered":"<p><a href=\"https:\/\/chaltenadvisors.ca\/blog\/wp-content\/uploads\/2015\/10\/Free-drinks.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-365 size-large\" src=\"https:\/\/chaltenadvisors.ca\/blog\/wp-content\/uploads\/2015\/10\/Free-drinks-1024x768.jpg\" alt=\"Free drinks\" width=\"640\" height=\"480\" srcset=\"https:\/\/chaltenadvisors.ca\/blog\/wp-content\/uploads\/2015\/10\/Free-drinks-1024x768.jpg 1024w, https:\/\/chaltenadvisors.ca\/blog\/wp-content\/uploads\/2015\/10\/Free-drinks-300x225.jpg 300w, https:\/\/chaltenadvisors.ca\/blog\/wp-content\/uploads\/2015\/10\/Free-drinks.jpg 1280w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/a><\/p>\n<p>&#8220;When you rely on incentives, you undermine virtues. Then when you discover that you actually need people who want to do the right thing, those people don&#8217;t exist because you&#8217;ve crushed anyone&#8217;s desire to do the right thing with all these incentives.&#8221; &#8211; Barry Schwartz, psychology professor and author<\/p>\n<p>&#8220;If I, taking care of everyone&#8217;s interests, also take care of my own, you can&#8217;t talk about a conflict of interest.&#8221; \u00a0&#8211;\u00a0Silvio Berlusconi, Italian media tycoon, former Italian Prime Minister, convicted tax fraudster<\/p>\n<p>When we speak to people about investing we stick to the mantra that long term success in investing is less about outsmarting the market and more about accepting the market and staying out of trouble. \u00a0Trouble usually manifests itself in one of the following ways:<\/p>\n<ul>\n<li>high and\/or hidden fees<\/li>\n<li>lack of diversification<\/li>\n<li>inappropriate investments for your risk profile<\/li>\n<li>under-utilization of tax efficient accounts<\/li>\n<li>conflicts of interest between you and those that want to sell you something<\/li>\n<li>your own behaviour<\/li>\n<\/ul>\n<p>Conflict of interest is an interesting one. \u00a0Many Canadian investors who invest in mutual funds purchase them\u00a0from an advisor\u00a0who is paid a commission for selling them those mutual funds. Commissions are how a large number of financial advisors in Canada are paid for the advice they give. \u00a0This situation gives rise to the potential for conflict of interest between the end investor and their financial advisor. \u00a0While the presence of a commission based arrangement does not automatically mean\u00a0advisors will put their own interests ahead of those of their clients, you could see\u00a0how the potential is\u00a0there. \u00a0For example, equity mutual funds often pay higher commissions than bond mutual funds. \u00a0Might this commission structure\u00a0influence the advice an advisor gives on asset allocation between equities and bonds? \u00a0Possibly.<\/p>\n<p>The issue of incentives and conflict of interest in the investment industry is currently a hot topic in Canada and one regulators are keen to tackle in the near future. \u00a0Other countries such as\u00a0the United Kingdom and Australia have sought to protect investors by banning certain commission practices. \u00a0While the US has not yet banned certain commissions practices, education, competition and innovation from market leaders such as\u00a0Vanguard and others seem to have provided end consumers\u00a0with more abundant conflict-free choices when it comes to their investments. \u00a0Currently, Canadian investors pay some of the highest mutual fund fees in the world, much due to the presence of embedded\u00a0commissions.<\/p>\n<p>In its efforts to determine the best policy action\u00a0for Canada, the Canadian Securities Administrators (CSA)\u00a0commissioned an independent study on the impact of fees on mutual fund performance and fund flows. \u00a0That report released last week &#8211;\u00a0<em><a href=\"https:\/\/www.securities-administrators.ca\/uploadedFiles\/General\/pdfs\/Dissection%20Fund%20Fees%20Flows_October%2019%202015_FINALEng.pdf\" target=\"_blank\">A Dissection of Mutual Fund Fees, Flows and Performance <\/a>&#8211;\u00a0<\/em>\u00a0is not an easy read but generally concludes that a) the presence of commission fees does indeed impact\u00a0how advisors&#8217; direct their clients&#8217; investment dollars and b)\u00a0the\u00a0end result is bad for investors in terms of investment performance. \u00a0Perhaps this is the final evidence the CSA needs to take decisive action. \u00a0 Perhaps they&#8217;ll need more time. \u00a0In the meantime, we hope education, competition, innovation and\u00a0the growth of better options\u00a0help\u00a0Canadian investors to\u00a0make\u00a0more sensible decisions for themselves.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;When you rely on incentives, you undermine virtues. Then when you discover that you actually need people who want to do the right thing, those people don&#8217;t exist because you&#8217;ve crushed anyone&#8217;s desire to do the right thing with all these incentives.&#8221; &#8211; Barry Schwartz, psychology professor and author &#8220;If I, taking care of everyone&#8217;s <a class=\"read-more\" href=\"https:\/\/chaltenadvisors.ca\/blog\/incentives-and-conflicts-of-interest-matter-more-evidence-for-canadian-investors\/\">[&hellip;]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,17,10,7,14],"tags":[],"class_list":["post-364","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-costs","category-evidence-based-approach","category-graham-bodel-posts","category-investment-industry-issues"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/364","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=364"}],"version-history":[{"count":2,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/364\/revisions"}],"predecessor-version":[{"id":367,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/364\/revisions\/367"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=364"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=364"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=364"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}