As the European Union considers banning inducements (aka kickbacks) for investment advice as part of its forthcoming retail investment strategy, those who support inducements, like Luxembourg’s ALFI and the worldwide CFA Institute, but also strong critics of inducements, such as the EU’s commissioner for financial services Mairead McGuinness and EU investor and financial service users organisation Better Finance are making their widely divergent views known.
The CFA Institute, the global association of investment professionals, revealed in its Global Survey on Inducements that most of its members are of the view that a ban can’t stop the sale of inappropriate investment products to investors.
The CFA survey, showed that only a third (34 per cent) of investment professionals surveyed in the EU think inducement payments should be banned, with most taking the view that this could have a negative impact on the variety of products offered to clients.
Favouring literacy & education
According to the survey, in contrast to an outright ban, respondents favoured increased efforts on financial literacy and investor education (59 per cent) and requiring clear disclosure of all commissions received by distributors before investments are made (55 per cent).
Josina Kamerling, head of regulatory outreach for CFA Institute in EMEA, said a blanket ban on inducements could seriously compromise the functioning of financial markets.
“Some countries will go completely broke, as in Germany the entire insurance sector is tied to this. You first have to see how you make the markets converge. Only then can you see if you can arrive at a total ban on inducements. There is also an emotional aspect to it, but we have to get rid of that. What is the middle position, and what does the financial industry say, and where can we find each other in the middle?”
No fees for advice
The view on inducements from Luxembourg-based investment fund industry association Alfi is broadly similar. “In order to foster retail investor participation, it is important that retail investors can receive quality financial advice, without the need to pay advance fees,” said a spokesman. Alfi has taken a consistent position against any ban on inducements or commissions over the years.
If investors were required to pay directly, Alfi said, “there is a risk that many investors would simply not be able to benefit from adequate financial advice and would turn to questionable or insufficient advice and/or less regulated products.” This is what is often referred to as an “advice gap”. The organisation also said a ban could reduce protection for retail investor protection in Europe.
Asked how to increase retail investor participation without a ban, Alfi expressed the view that existing laws, including the the Markets in Financial Instruments Directive (MiFID) framework impose transparency requirements on fees. The organisation prefers measures increasing transparency for investors to a ban.
“These could be enhanced by targeted improvements, addressing potential conflicts of interest and fostering the retail investors’ understanding of the concept of inducements,” it said.
Less competition
Alfi suggested that an inducements ban might reduce competition between distribution channels “which could result in a reduction in the number of products offered to investors.” It might lead financial groups to focus on internally-developed products, they said.
However, a European Commission study on retail investment product distribution channels said this already happens: “non-independent advisers at banks and insurance companies almost exclusively proposed (one or a selection of a few) in-house products.”
Alfi and other organisations following this line take the view that investors are already receiving quality financial advice. The European Commissioner for financial services, Mairead McGuinness openly questioned that view in a recent speech. She referred to an impact assessment that showed that “retail investors are often advised to buy more expensive products and/or products which are not always the most suitable for their needs.”
Better value for money
She discussed the impact of the Netherlands’ ban on inducements, noting that it had led to a slight increase in the level of retail investment.
Better Finance, which refers to inducements as “commissions” has made its business to highlight what it calls “smoke and mirrors” used by asset managers and distributors to “obfuscate the negative effects of commissions, twisting certain findings to fit their false narrative.” It states that “Investment advice is never free of charge. Whether directly or indirectly, the client always pays for it.”
The organisation attacks the notion of an “advice gap” (meaning only wealthy people get financial advice) based on experience in jurisdictions which already ban inducements (the UK and the Netherlands.) They point to evaluations showing the opposite of an “advice gap”, pointing out that “independent advice (fee based model) is available for retail investors for as little as 1 euro in investable assets.” They added that “retail clients have benefitted from a wider, more innovative and simpler range of products and services.”
Jurgen Vluijmans at Investment Officer Belgium contributed to this article.