Letters to the editor: IIROC firms already meet the best interests of their clients

Re: It’s time to ban embedded fees, editorial, Investment Executive, August 2016

I am exactly the type of advisor you purport will benefit from the “gift” of a ban on embedded mutual fund commissions. I am well-established, having already obtained all my licenses and credentials, and I am ahead of the curve, having offered fee for service relationships for some time. More than half of my clients are on a fee for service basis already.

But the fact is that fee for service is not always the best fit for every client. Bear in mind that the average Canadian has a relatively modest amount of money to invest. In my experience, it is awkward, at best, to operate accounts below $100,000 on a fee for service basis. And I don’t mean awkward, as in embarrassing, I mean as in clumsy, inefficient and labour intensive (and therefore more expensive). In other words, fee for service is often inferior.

The options for the client to pay their fees are to inject new cash, to redeem investments (with potential tax consequences), to direct part of the portfolio into income producing investments (and potentially away from their real financial objectives), or to hold back cash in reserve for operational expenses. Each of these options has consequences and none are necessarily better than the infrastructure that already exists for clients to pay their fees indirectly via a mutual fund MER.

If embedded commissions are abolished then lower value clients will be abandoned to computer algorithms and faceless, rotating clerks. That’s the inseparable reality of the proposal.

And to what end? Investor protection is held up as the lofty goal, as it rightly should be. But there is a fundamental disconnection here. It’s an erroneous assumption that a compensation system is causal to good behaviour. It’s not.

Any compensation system can be gamed. If there is a rogue out there that is currently operating under an embedded fee model and they are shuffled into a fee for service model, that doesn’t suddenly turn the rogue into a nice guy. If anything, a fee for service model is more open to abuse than embedded commissions.

We’ve had a focus on investor protection for some time, yet that did nothing to stop Earl Jones or Ian Thow, and neither of those colossal crimes had anything to do with embedded commissions.

The unspoken assumption in your editorial is that direct billing is actually something that clients want. I think that assumption needs to be questioned. I can tell you from experience that it is something that will be met with more resistance than you think. Clients want to know they are being taken care of. Banning embedded commissions is going to give them inconvenience and complexity, but will do nothing to actually assure good care.

Currently, I have the option to use fee for service if that is the best fit for the client, or to use the traditional transactional method if that is preferable. It’s a fallacy to think that impairing my ability to practice my craft is beneficial to the client.

The banning of embedded commissions is no panacea. It’s more a Pandora’s Box. The clients that would benefit from fee for service can access it already. But banning commissions altogether would inevitably force some clients into an inferior option for them, all because of the misguided narrative that a compensation system is equivalent to professionalism. This smug assumption is simplistic and based solely on paternalistic dogma.

And remember, this is coming from someone who will benefit greatly from a ban on commissions. I will be one of the last advisors standing should a ban on commissions come to pass. I will have my pick of clients. It’s in my own self-interest to remain silent now, and later pick through the debris for treasure. But my personal gain will be to the detriment of the average Canadian investor and to the obliteration of less established advisors.

Brad Brain, CFP, R.F.P., CLU, CH.F.C., FCSI, TEP
President, Brad Brain Financial Planning Inc.
Fort St. John, BC

Photo copyright: gajus/123RF