Securities regulators are preparing to offer independent financial advisors a gift this fall, when they are expected to propose a ban on embedded mutual fund commissions. While Bay Street surely will gear up to fight the idea, shrewd advisors should be ready to support it.
In late June, the Canadian Securities Administrators (CSA) announced that it plans to publish a consultation paper in the autumn that will propose outlawing embedded compensation, requiring instead that investors pay advisors directly for their services. The CSA’s rationale for the move ostensibly is investor protection. For several years now, regulators have been concerned that many investors don’t know that they are paying trailer fees. Now, regulators are armed with research that confirms that these compensation arrangements skew sales and negatively affect investors’ returns.
Eliminating embedded commissions will, the regulators hope, force investors and advisors to agree explicitly on compensation; lead to better alignment of investor and industry interests; and purge the distorting effects of many current advisor compensation arrangements.
One of the biggest beneficiaries of such a move is likely to be independent advisors. For too long, advice has been devalued by embedded compensation, which distorts the market for advice and undermines advisors’ value to clients. Trailer fees work well for the investment fund companies and for dealers because trailers serve as a powerful incentive to accumulate assets – but these fees don’t reward superior advice to clients and don’t allow high-quality advisors to distinguish themselves.
That’s why advisors should embrace the CSA proposal to eliminate embedded compensation as a once-in-a-lifetime opportunity to shed a system that devalues their service, deters them from developing into genuine professionals and often compels them to be simply salespeople.
Supporting such a fundamental change will, of course, be difficult. But now is the time to recognize that preserving the current compensation arrangement is an outdated idea. The eradication of embedded commissions, and a move to a free market in financial advice, ultimately will benefit both clients and quality advisors. It’s time to embrace that change.
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