It’s doubtful that Canadian securities regulators will have the guts to kill embedded commissions – but it’s evident that they should.

The philosophical arguments against embedded compensation models are compelling for both investors and financial advisors alike. The existence of built-in fees creates needless conflicts of interest and hinders transparency. Embedded fees distort the economics of the investment business and undermines the value of advice.

Now, securities regulators have empirical evidence of that hypothesis. Research commissioned by the Canadian Securities Administrators last year definitively demonstrates the pernicious effects of embedded fee models.

The counter-arguments are flimsy. Defenders of the status quo argue that embedded fees enable lower-asset clients to have access to much needed financial advice. Without embedded fees, they argue, servicing these clients won’t be economical, which may lead to an “advice gap” that leaves less affluent, less sophisticated clients without service.

Yet, the so-called “advice gap” already exists. Dealers already draw lines that exclude certain clients. Doing away with embedded commissions may alter where certain firms choose to draw that line – but that will be a difference of degree, not a difference of kind.

And the fact that eliminating embedded fees reportedly would make serving smaller accounts uneconomical implies that higher-value clients currently are subsidizing the costs of serving those smaller accounts. That hardly seems fair to these clients. Surely that premise is not in their best interests, nor is it being disclosed to them.

Policy-makers also now have the benefit of a followup review in the U.K. that examined the alleged “advice gap” there, which concluded that there’s absolutely no case for going back to commissions. That finding dashed the hopes of a return to the old system for investment industry reactionaries. Investment Executive’s latest Regulators’ Report Card also found signs of support for reform in Canada. According to our research, a slight majority of compliance officials see the wisdom of moving to more explicit, upfront compensation models. Hopefully, regulators will, too.


Read the response from Advocis to this editorial: Banning embedded fees will hurt investors, Advocis says, April 7, 2016

Read the response from an advisor: Embedded fees provide clients with options, April 14, 2016

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