Broker pay reform would benefit investors, financial analysts say

Firms that provide guidance to retail investors should link their executives’ and brokers’ pay to delivering good investment outcomes for their clients, according to a survey of securities analysts in North America.
A slight majority (54%) of 158 investment professionals who hold the chartered financial analyst designation said that they support reforming compensation structures at firms such as broker-dealers and insurance companies that offer their employees commissions or other financial inducements for selling investment products.
An even bigger majority of the analysts (68%) said that they support “mandating full disclosure of product cost structures to clients,” and about two-thirds said that they support a requirement that financial advisers disclose to clients all the commission payments that they receive.
They think that compensation reform would reduce the likelihood that clients are sold products at odds with their investment objectives.
But just 15% said that they would support an outright ban on commissions.
The CFA members were surveyed last May. Professionals who hold the CFA designation include analysts, asset managers and advisers.
The survey was released as part of a 68-page report by the CFA Institute, and it grapples in large part with issues outside the United States. Regulators in Australia and the United Kingdom have restricted or banned commission payments for advisers in recent years, while other countries have opted to increase compensation disclosures.
The CFA Institute has championed the latter approach, warning that outright bans on commissions could restrict the product choice and financial advice available to less-wealthy investors.
In the United States, by contrast, advisers have increasingly shifted to fee-based and even fee-only service models in the past decade despite faltering efforts to address the vast discrepancy between how different kind of advisers are regulated.
Nearly six in 10 advisers earned most of their revenue from fees last year, up from 41% in 2004, according to research firm Cerulli Associates Inc.
The number of fee-only advisers doubled in the same period, they said.
“If an industry doesn’t self-regulate well, there will be regulation imposed on it, so I think it behooves the industry in the U.S. to regulate itself,” said Matthew M. Orsagh, director of capital markets policy for the CFA Institute and an author of the report. “In most every case it’s better for the market to regulate itself.”
But the CFA Institute report acknowledged that a shift to fee-based models risks discouraging consumers from using advisers, as many view commission-based models as “free” and “disclosure of conflicts of interest can lead to a loss of trust among consumers.”
“The average retail investor may be predisposed to be averse to upfront fees paid to advisers,” according to the report. “So, either approach — commission ban or more transparency — is imperfect.”
The Financial Services Institute Inc., an advocacy group that represents independent broker-dealers, declined to comment through a spokesman, Christopher J. Paulitz.
A spokeswoman for the Securities Industry and Financial Markets Association declined to comment.