While levelizing compensation for similar products can reduce incentives to recommend one mutual fund over another or one annuity over another, it doesn’t eliminate the incentive to recommend types of investment products, such as variable annuities, non-traded REITs, and structured products, that offer more generous compensation, CFA noted.
Brokers have argued that differences in compensation are warranted by differences in the time it takes to analyze the products and explain their features to investors. But the higher compensation provided by these products largely explains why they feature so prominently in stories of abusive sales practices, CFA said.
The answer, according to Roper? Objective, written analysis explaining why higher-priced objectives cannot be accomplished more efficiently through other reasonably available investment products or strategies.
In CFA’s example, if a broker-dealer recommends that an investor purchase a variable annuity or a non-traded REIT, the broker dealer should be required to provide an analysis documenting the investor’s need for that particular type of investment and why it is a better option for the investor than other available investment products and strategies.
If the rep can’t support the recommendation and justify costs, he or she should not be permitted to make the recommendation, CFA said.
Advisors who recommend rolling over a workplace retirement account into an IRA should also be required to perform analysis comparing the customer’s current account with other options at the firm, CFA said.
“This analysis would include a comparison of the relative costs, available investments, and different level of services, for example, in order to make an ultimate assessment of the value of the recommended transaction,” CFA said.
This is critical since few firms can compete with the low costs available to participants in, for example, the federal government’s Thrift Savings Plan (TSP), making it difficult to justify a rollover that could easily increase the investor’s annual costs by 30 to 40 times for similar products, CFA noted.
“The benefits to investors of a more product-neutral approach to broker compensation are obvious. If investment products were forced to compete based on their own merits (cost and quality), rather than by compensating the broker, the best products would thrive, to investors’ benefit,” CFA concluded.
This article was provided by Bloomberg News.