The European Commission plans to stick to its plan to stop inducements for financial advisors, a proposal it recognises as “divisive” but one that is needed to build trust among investing consumers. “I think it’s good to grasp this nettle and to make change for the better,” said EU Commissioner Mairead McGuinness.
The EU retail investor strategy is due to be launched this Spring. Addressing the European parliament’s economic affairs committee, McGuinness said that she is looking at the role of financial advisors.
“I want to ensure that consumers receive fair advice that is right and meets their needs,” she told the committee.”Inducements can lead to conflicts of interest that can have a negative effect on the quality of investment advice.”
“Retail investors are often advised to buy more expensive products, and/or products which are not always the most suitable for their needs,” she said. “Low-cost products, like Exchange Traded Funds, are hardly ever recommended.”
Industry fears ‘advice-gap’
Europe’s investment industry fears an EU-wide ban. Trade association Efama said ending kickbacks would translate into an “advice-gap” for less affluent investors. Efama pleads for the continued co-existence of commission-based and fee-based models.
McGuinness, speaking on 24 January, said the European Commission is looking into measures to facilitate access to cost-efficient investment services and to increase retail investor engagement. “The idea would be to reduce possible barriers to affordable advice.”
Inducements or kick-backs are benefits or commissions given to financial advisors by a third party, typically the manufacturer of a financial product. A discussion on the future of inducements has been going on for some time already. The European Commission, in an impact assessment, already has concluded that inducements have a negative impact on the net returns that consumers can expect.
‘35% more expensive. 35%’
“The Retail Investment Study shows that products where inducements are paid are on average 35 percent more expensive for retail investors than investment products where no inducements are paid,” McGuinness said. “And maybe it’s worth repeating that figure, 35 percent.”
The commissioner, formally responsible for financial services, financial stability and Capital Markets Union, said this number comes despite safeguards against conflicts of interest already in place inMiFID and the Insurance Distribution Directive.
In her discussion with the parliament, McGuinness referred to a positive experience in the Netherlands, where inducements were banned a few years ago. “In the Netherlands, this led to a shift towards less expensive and more diverse products, resulting in better value for money for retail investors,” she said.
Dutch kick-back ban boosted trust levels
“Overall, we can say the Dutch inducement ban has not led to a reduction in retail investment – and in fact, there has been a slight increase,” she noted, adding that “the level of trust in financial advice has also increased.”
McGuinness acknowledged that there is no level playing field in Europe when it comes to financial product sales, investor behaviours and financial literacy, but she underlined that “biased advice” in commission-based models does not serve retail investors.
“So it’s a question of what is the advice and is it in their best interest,” McGuinness said. “We need to consider I think particularly the position of small investors, who don’t have a huge amount of money to invest or indeed to spend on advice. Small investors would benefit from independent advice and low-cost products that they currently have less access to right now.”
McGuinness said the discussion about kick-backs goes beyond a call for more transparency. “I firmly believe that all EU consumers have the right to decent advice at decent prices. We need to remove the obstacles that stop people investing on capital markets, and also prevents them making the most of their money.”