The head of the U.S. Securities and Exchange Commission says financial professionals should provide investors with clear information about their compensation as well as about the products they sell.
Broker-dealers and other producers should tell clients at the point of sale “about the compensation the professional will receive on each product being sold–and information about the conflicts that may be causing the advisor or salesman to steer the investor to a certain investment,” said Mary L. Schapiro, SEC chairman, in a speech yesterday to the Consumer Federation of America. Washington.
When dealing with financial professionals, comparative shopping is not easy for consumers, she said.
“In my mind, this should not be the case,” she added. “I believe retail investors should be provided clear, simple, meaningful disclosure at the time they are making an investment decision–disclosure that includes comprehensible and comparable information about the securities products and services being offered.
“It also should include information about the compensation the professional will receive on each product being sold — and information about the conflicts that may be causing the advisor or salesman to steer the investor to a certain investment,” she said.
The SEC is developing a simplified summary prospectus for variable annuities, which are “one of the most difficult-to-understand products on the market,” she said. “It is precisely in this type of product where simplicity of disclosure is essential.
She also emphasized that fees imposed by mutual funds to compensate securities professionals also should be disclosed clearly. These fees, know as 12b-1 fees, are automatically deducted from mutual funds.
“The problem is that our investor may have no idea these fees are being deducted or who they are ultimately compensating,” she said. “That’s why I believe there needs to be a better approach.”
In 2008, 12b-1 fees amounted to more than $13 billion, compared to just a few million dollars in 1980, when they were first permitted, she observed..