Almost two-thirds of investment advisors surveyed for Investment Executive‘s (IE) 2018 Brokerage Report Card were in favour of the Canadian Securities Administrators (CSA) taking regulatory action to address concerns surrounding the use of embedded commissions. But exactly what the CSA should do is something advisors don’t agree on.
Advisors were asked whether they’re in favour of the CSA taking regulatory action regarding the use of embedded commissions in a supplementary question added to this year’s Report Card survey.
The question was added in response to a CSA consultation paper published in January 2017 that raised the possibility of discontinuing embedded commissions because they’re considered to “raise conflicts of interest that misalign the interests of investment fund managers, dealers and representatives”; “limit investor awareness, understanding and control of dealer compensation costs”; and “generally … not align with the services provided to investors.”
The response IE received: 63.5% of advisors agreed that the CSA should take action. Although some advisors support a complete ban on embedded commissions, others said regulators should take steps to enhance transparency instead. The advisors who oppose the idea of the CSA taking any sort of measure said embedded commissions are fine the way they are.
Among the advisors who favour regulatory action, there was a vocal minority who are strongly in favour of the CSA banning embedded commissions. These advisors believe this course of action will both improve transparency in the way advisors get paid and get rid of any potential conflicts of interests advisors may have when recommending investments to their clients.
“[Embedded commissions] should be outlawed. They’re dishonest; they’re not transparent to the investor,” says an advisor in Atlantic Canada with Toronto-based CIBC Wood Gundy. “They also created wrong incentives for advisors.”
“I am dead set against the commissions-based model,” says an advisor in Ontario with Montreal-based National Bank Financial Ltd. “I find the incentives are completely backward. I’m completely opposed to [embedded commissions].”
“I’m 100% [in favour of the CSA taking action],” adds an advisor in Alberta with Toronto-based ScotiaMcLeod Inc. “Embedded fees create conflicts of interests and rip off clients.”
However, most advisors who were in favour of regulatory action don’t believe banning embedded commissions is the answer. Rather, these advisors said regulators should take steps to improve transparency, and added that embedded commissions remain a viable option.
“Am I in favour of regulators addressing concerns related to embedded commissions? Yes. Am I in favour of getting rid of them? No,” says an advisor in British Columbia with Vancouver-based Canaccord Genuity Wealth Management (Canada). “Transparency is great, but advisors also need to be paid. There’s a general notion among many investors that we work for free. [But] once you explain how you get paid, they understand. Clients are great with transparency.”
Adds an advisor in Ontario with Mississauga, Ont.-based Edward Jones: “Transparency is a good direction we’re going toward. Investors can’t expect that advisors should work for free. There should be [greater] disclosure, but [the CSA] shouldn’t strip away those fees.”
Meanwhile, a ScotiaMcLeod advisor in B.C. stressed that any changes the CSA makes should be fair for everyone in the broader investment industry so that advisors don’t favour certain products over others: “[Regulators] need to make sure we have a level playing field. The review needs to be done across all product lines.”
Other advisors who are in favour of regulators taking action on embedded commissions expressed concern that if the CSA bans embedded commissions, that could create unexpected consequences that could harm smaller investors and advisors.
“If [regulators] eliminate [embedded commissions], that would be wrong because it would damage small investors and young advisors,” says an advisor in B.C. with Toronto-based Raymond James Ltd. “[The CSA] would be doing a huge disservice to the young, who should be beginning to save now.”
“If [regulators] want to ban trailer fees, that will hurt independent financial planners or mutual fund salespeople more than me,” says a Wood Gundy advisor in B.C. “[A ban] is definitely not the cure-all the CSA thinks it is.”
Many advisors who weren’t in favour of regulatory action agreed with each other, and some were more steadfast in their belief that no action should be taken. Specifically, some advisors pointed to the results of banning embedded commissions in the U.K. and Australia, which led to lower-income clients being turned away by advisors because of the higher costs associated with giving these clients financial advice.
“In England and Australia, [a ban] didn’t really work out,” says an Edward Jones advisor in Ontario. “I would hate to turn people away because they can’t afford us. People need the advice.”
Other advisors who are opposed to regulators taking any action said there’s enough transparency in how advisors get compensated now, thanks to the introduction of the second phase of the client relationship model (CRM2).
“CRM2 has addressed that issue,” says an advisor in B.C. with Toronto-based BMO Nesbitt Burns Inc. “Now that we have to disclose [how we’re getting paid] anyway, so what if I’m taking a trailer or charging a fee? It’s the same thing.”