Re: Morningstar calls for an end to embedded commissions, by James Langton, June 8, 2017

Re: IFIC, Advocis push back against potential embedded commissions ban, by James Langton,, Jan. 11, 2017

I can’t help but notice the very biased submissions in favour of banning embedded commissions from investment industry players that are either very far removed from the average investor or stand to benefit directly from such a ban.

In the first article, Morningstar states that clients’ best interests are served by lower-cost index funds and ETFs as opposed to actively managed funds that pay embedded commissions, such as trailer fees. One can only assume that Morningstar makes this statement based on two recurring, flawed arguments: cheaper is better; and most actively managed funds don’t outperform their benchmark on selective reporting periods that favour passive investing supporters (ETF and index fund suppliers, the Ontario Securities Commission [OSC], to name just a few).

Price is not everything in investing and Morningstar’s argument does not take into account that most investment advisors choose not to invest in cap-weighted, potentially volatile index funds for a variety of reasons, volatility being the most common one. By the way, 100% of index funds and 100% of passive index ETFs underperform their benchmarks, but that fact is conveniently ignored. The expression “Price is what you pay, Value is what you get” seems to apply here.

Discussions focused on price appear to discount the value of advice and the importance of assessing an investor’s ability to withstand risk, which is a critical component in meeting a financial advisor’s know-your-client requirement. As for the “value” component, it has often been said that an investor’s biggest cost in retirement is not the management expense ratio at all, it’s taxes. Advisors receiving embedded commissions provide that value in almost all cases whereas discount brokers and robo-advisors clearly do not.

Morningstar and the robo-advisor community also dispute industry claims that banning embedded commissions will leave small investors without access to advice despite evidence to the contrary from the OSC’s very own “mystery shopper” exercise, in which these shoppers were unable to get anyone to take an appointment unless they declared that they had at least $100,000 to invest. They argue that robo-advisors can fill that gap.

Anyone that has taken the time to look at traditional robo-advisor platforms will tell you that robo-advisors don’t offer financial, retirement, tax, estate planning, and risk management advice for an investor’s specific situation. You answer some questions, get a score, and end up with a “one size fits all” portfolio. There’s nothing wrong with that if you are only looking for an impersonal, computer-driven investment mix, but let’s not call that financial advice. The investment recommendation component of embedded commissions (trailer or service fees) may only be 10 basis points (bps) to 20 bps out of the 50 bps to 100 bps that the advice channel receives for a full advisory relationship. In that regard, the advisory channel is not much different in price than the robo-advisor channel. In my more than 30 years in this industry, I have found that investors are willing to pay something for advice, and the robo-advisor channel does not offer that advice for small investors.

Prior to this, in the article entitled IFIC, Advocis push back against potential embedded commissions ban published on Jan. 11, we hear that the Portfolio Management Association of Canada (PMAC) also supports a ban on embedded commissions. “Avoiding embedded commissions is not new. Traditional investment counsel/portfolio managers (ICPMs) follow the long-standing practice of charging fees to clients directly with these fees being clearly established from the onset of the relationship and reported when fees are deducted from a client’s account,” says Michael Mezei, the president of Mawer Investment Management Ltd. and PMAC director. How altruistic of them!

Here, again, PMAC and the ICPMs have missed the point of the discussion on banning embedded commissions. This is not about what’s best for the wealthiest 1% of Canadians who have, or may someday have, enough money to get in the door of these same ICPMs. It’s about what is best for average Canadian families and how our industry can best serve them through sound financial, retirement, tax, estate planning and risk-management advice to help them accomplish their financial goals and live comfortably in retirement.

Mark Kent
President and CEO
Portfolio Strategies Corp.

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