What would investing be like if there were no commissions? Jason Zweig, in the WSJ
's Intelligent Investor
column, wrote that new regulations in Australia and Europe give U.S. investors a good idea of what the market would look like when advisors' pay is no longer attached to the product advisors sel.
Beginning this week, commissions on investments such as mutual funds will be banned in Australia and the Dutch government will enact a law banning commissions. Last year, new rules in Britain banned commission and required financial advisers explain how much their advice costs.
The idea behind the laws in these countries is to incentivize good advice, as adviser's fees were identical, based on the mutual fund company whose product they sell. In some cases, this leads advisers to recommend whichever funds pay them best.
While Zweig entertains the possibility that this commission ban would reach the U.S., Morningstar
's John Rekenthaler
said such a sweeping change is probable. India has banned front-end commissions and Germany and Sweden are considering them.
Rekenthaler doesn't consider the abolition of commissions unequivocally good as he believes the costs will simply transfer elsewhere to an annual management fee or advisory fee that will disadvantage the long-term investor. Before a ban takes place the advisory fee system would have to change first.
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