COM­MIS­SIONS

Most ad­vi­sors sur­veyed for this year’s Deal­ers’ Re­port Card were strongly against reg­u­la­tors ban­ning em­bed­ded com­mis­sions

Investment Executive - - CONTENTS - BY AN­THONY BUR­TON

Most ad­vi­sors who ply their trade at mu­tual fund deal­ers are op­posed to the CSA ban­ning em­bed­ded com­mis­sions.

given that the fi­nan­cial ad­vi­sors who ply their trade at Canada’s mu­tual fund and full-ser­vice deal­ers make their liv­ing sell­ing mu­tual funds, there can be lit­tle sur­prise that a clear ma­jor­ity of the ad­vi­sors sur­veyed for this year’s Deal­ers’ Re­port Card were op­posed to the Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors (CSA) tak­ing reg­u­la­tory ac­tion to ad­dress con­cerns sur­round­ing the use of em­bed­ded com­mis­sions.

Ad­vi­sors were asked whether they were in favour of the CSA tak­ing such ac­tion in a sup­ple­men­tary ques­tion added to this year’s Re­port Card sur­vey. The is­sue gained at­ten­tion fol­low­ing a CSA con­sul­ta­tion pa­per pub­lished in Jan­uary 2017 that sought rec­om­men­da­tions re­gard­ing what should be done to ad­dress the con­flicts of in­ter­est that could arise from the sale of units in mu­tual funds that have em­bed­ded com­mis­sions.

Mu­tual funds rep­re­sent more than 69% of these ad­vi­sors’ prod­uct sales on av­er­age, ac­cord­ing to the re­sults of this year’s Re­port Card, which means that any changes reg­u­la­tors make in the way mu­tual funds are sold will im­pact these ad­vi­sors greatly. Thus, 52.5% of ad­vi­sors said the CSA should not take any ac­tion on the use of em­bed­ded com­mis­sions. The ad­vi­sors who be­lieve some sort of reg­u­la­tory ac­tion is called for sug­gested that reg­u­la­tors fo­cus on pro­vid­ing ways to in­crease trans­parency and dis­clo­sure about how ad­vi­sors are paid rather than ban­ning em­bed­ded com­mis­sions.

The chief con­cern of the ad­vi­sors who re­sponded against reg­u­la­tory ac­tion is that a shift from em­bed­ded com­mis­sions and to­ward fee-based com­pen­sa­tion mod­els will pre­vent clients with lim­ited in­vestible as­sets from be­ing able to af­ford fi­nan­cial ad­vi­sory ser­vices.

“Smaller clients won’t have ac­cess to the same ad­vice if [reg­u­la­tors] take away the dif­fer­ent com­pen­sa­tion mod­els,” says an ad­vi­sor in On­tario with Toronto-based Des­jardins Fi­nan­cial Se­cu­rity In­de­pen­dent Net­work (DFSIN). “If you work back­ward from the math, there’s not enough money.”

“[Fi­nan­cial ad­vice] would be­come very ex­pen­sive for peo­ple, es­pe­cially the smaller clients,” adds an ad­vi­sor in the same prov­ince with Toronto-based Hol­lisWealth Inc. “Mil­len­ni­als will use robo-ad­vi­sors, but 50and 60-year-olds will not. There will be a lot of or­phaned peo­ple.”

Many ad­vi­sors who were against reg­u­la­tory ac­tion on em­bed­ded com­mis­sions also brought up the re­sults of reg­u­la­tors in Aus­tralia and the U.K. tak­ing sim­i­lar ac­tion, such as the im­pact that such a ban had on clients with lim­ited in­vestible as­sets.

“The model that [the CSA] is propos­ing will not work for the av­er­age Cana­dian in­vestor,” says an ad­vi­sor in On­tario with Cal­gary-based Port­fo­lio Strate­gies Corp. “If you look at Aus­tralia and the U.K., [a ban] didn’t help at all. In­stead, it hurt the av­er­age in­vestor ter­ri­bly.”

Ad­vi­sors also pointed out that a ban on em­bed­ded com­mis­sions not only will make ac­cess to fi­nan­cial ad­vice more dif­fi­cult for smaller clients, but such a ban also will pre­vent ad­vi­sors who are new to the in­vest­ment in­dus­try or who have smaller books of busi­ness from es­tab­lish­ing them­selves in the busi­ness.

“Com­mis­sions are there to help a new ad­vi­sor sur­vive,” says a DFSIN ad­vi­sor in On­tario. “My first year in this busi­ness, I [brought in] only half a mil­lion [in as­sets un­der man­age­ment]. If I didn’t have [em­bed­ded] com­mis­sions [on top of base pay], I would’ve made only $15,000.”

“I’m the guy with the lit­tle book, right?” adds a Port­fo­lio Strate­gies ad­vi­sor in Al­berta. “Em­bed­ded com­mis­sions al­low me to par­tic­i­pate in this in­dus­try, and I pro­vide great ser­vice to my clients, who would be talk­ing to some­one at the bank or us­ing a robo-ad­vi­sor [in­stead], which is no [per­son­al­ized] ad­vice at all.”

Even those ad­vi­sors who favoured reg­u­la­tors tak­ing some sort of ac­tion re­gard­ing em­bed­ded com­mis­sions were em­phatic that their sup­port does not trans­late to a ban on em­bed­ded com­mis­sion mod­els.

“I’m sup­port­ive of [reg­u­la­tors] ex­am­in­ing [em­bed­ded com­mis­sions, but] I don’t be­lieve tak­ing them out is nec­es­sary or good,” says an ad­vi­sor in On­tario with Mis­sis­sauga, Ont.-based In­vest­ment Plan­ning Coun­sel Inc.

The con­cerns some ad­vi­sors ex­pressed were far from be­ing solely about their own com­pen­sa­tion or sur­vival in the busi­ness. Rather, they said that em­bed­ded com­mis­sions are tied di­rectly to the unique ser­vices that ad­vi­sors at mu­tual fund and full-ser­vice deal­ers — who fo­cus mostly on mass-af­flu­ent clients — can of­fer in or­der to com­pete with the bro­ker­age houses and banks.

“If [reg­u­la­tors] get rid of trailer fees, that’s go­ing to make smaller clients un­prof­itable for the in­de­pen­dent deal­ers,” says a Hol­lisWealth ad­vi­sor in On­tario.

“I know [reg­u­la­tors] say that the banks are there for these clients, but I would ar­gue other­wise,” says an ad­vi­sor in Atlantic Canada with Toronto-based As­sante Wealth Man­age­ment (Canada) Ltd. “The banks’ ad­vi­sors have 1,500 clients [each], so [these clients] would get a cookie-cut­ter type of ser­vice. I just want peo­ple to get good, qual­i­fied help.”

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