RE: Science-denying tactics will do the mutual fund industry no good, by Neil Gross, Inside Track,, February 22, 2016

As we move closer to a decision on mutual fund fee reform, one thing remains clear: some do not wish to acknowledge what’s at stake for Canadians should regulators choose to ban commissions. Higher costs and limited access to advice are among the devastating repercussions.

In his recent Inside Track column, Neil Gross argues that a single research study is all the scientific proof we need to determine that trailing commissions are harmful and should be banned. He goes as far as suggesting that if anyone dares to question the study’s methodology or conclusions, the research team will “respond with precision and rigour, even if it humiliates you.”

While waving the flag of science and evidence-based decision-making, Gross fails to mention one crucial fact: banning commissions has already been tried and failed elsewhere.

The experience in the U. K. and Australia, which recently introduced commission bans, shows that eliminating embedded compensation drives financial advisors from the industry and forces the remaining advisors to increase their fees, thereby pricing advice beyond the reach of the general population.

According to research by the City University of London, the number of advisors dropped by approximately 25%following the U.K.’s ban of commissions. At the same time, the revenue per client necessary to maintain a viable financial advisory business increased, causing advisors to target clients with a higher net worth and reduce their focus on those with less investment income.

In Australia, the Future of Financial Advice (FoFA) reforms, which banned embedded commissions and other types of remuneration, have increased the costs associated with serving clients by more than 30%. In total, industry organizations estimate that the compliance costs related to FoFA reforms have been $700 million (in Australian dollars) so far. And who do you think absorbs those costs? Clients.

We have been fortunate to observe and learn from other jurisdictions. Now, U.K. regulators are considering how they might reintegrate some form of commission on certain financial products. It just doesn’t make sense to follow their example only to come to the same conclusion.

No one is suggesting that investors be forced to pay commissions — simply that they should have a choice in the matter. Not everyone can afford to pay an up-front hourly fee. The second phase of the client relationship model (CRM2) will increase transparency around fees and will help investors better understand their investment performance and the associated costs. Why not wait to determine the outcome of this initiative before moving hastily ahead with a regulatory overhaul that does more harm than good?

Today, we should focus on ensuring consumers can make informed choices. Banning commissions is not the answer to protecting Canadians. We must take a holistic approach, including setting new professional standards for all advisors, if we are to address the core issues that put Canadians at risk. This would put Canada in a position to set a global example, not follow a failed one.

Greg Pollock
President and CEO