Having said that, the rules need to be sensible and fair if the regulators and policy-makers hope to avoid creating a whole new loophole-finding-consulting gig for the lawyers and institutions.
Informing consumers of their total and actual costs in purchasing a product or obtaining advice should be a non-issue. Disclosing actual material conflicts should also be a non-issue. Disclosing indirect conflicts (such as acting for two competing parties simultaneously) where the only conflict management choice really is to withdraw and avoid the conflict should be a non-issue too.
There is a tendency for policy-makers to draft rules which do not actually disclose the benefits which may arise from a product sale or the delivery of advice though. Instead they focus upon the simplistic disclosure of one part of the transaction only.
In the sale of product or advice there are essentially three possible parts to the transaction. There is always “the possible gross revenue which can be generated” and then there is also always “the actual cost to the adviser of delivering that product or advice“. The third aspect which will be involved in some transactions (but not all) is “conflicts created by the remuneration structure“.
By NOT insisting on all three aspects being covered in disclosure there is a substantial risk of incorrect disclosure resulting in a reduction of trust and participation by consumers as an inaccurate portrayal of the advisers conflicts are being delivered.
That is unfair to industry, and just as unfair to consumers.
Consider the following;
So what should be disclosed?
Would the difference in these numberschange consumer perception, and therefore participation in the use of advice?
I believe so.
While I used an example of a brokerage-based product here, the same situation fundamentally arises with fee-based advice. That is especially true when one considers that very very few fee-based transactions are entered into at full time/cost recovery prices up front. Putting together a comprehensive financial plan for instance will take many advisers a solid 20-22 hours of labour time – about one-third to one-half of which is creating compliance-focussed documentation. Naturally consumers do not wish to pay for that stuff, and advisers do not want to try and charge them for it either, so it becomes a sunk cost to be recovered hopefully over time with further work.
The point is that there are real costs in delivery, and real business risks which the adviser must assume, and they all impact upon what the actual conflict is for the adviser. But not all elements are disclosed….because we are usually forbidden to do so by “the rules”.
When thinking about disclosure rules let’s try and create a system which is actually honest for all.
Can’t be more fair than that, surely?