Given that the financial advisors who ply their trade at Canada’s mutual fund and full-service dealers make their living selling mutual funds, there can be little surprise that a clear majority of the advisors surveyed for this year’s Dealers’ Report Card were opposed to the Canadian Securities Administrators (CSA) taking regulatory action to address concerns surrounding the use of embedded commissions.

Advisors were asked whether they were in favour of the CSA taking such action in a supplementary question added to this year’s Report Card survey. The issue gained attention following a CSA consultation paper published in January 2017 that sought recommendations regarding what should be done to address the conflicts of interest that could arise from the sale of units in mutual funds that have embedded commissions.

Mutual funds represent more than 69% of these advisors’ product sales on average, according to the results of this year’s Report Card, which means that any changes regulators make in the way mutual funds are sold will impact these advisors greatly. Thus, 52.5% of advisors said the CSA should not take any action on the use of embedded commissions. The advisors who believe some sort of regulatory action is called for suggested that regulators focus on providing ways to increase transparency and disclosure about how advisors are paid rather than banning embedded commissions.

The chief concern of the advisors who responded against regulatory action is that a shift from embedded commissions and toward fee-based compensation models will prevent clients with limited investible assets from being able to afford financial advisory services.

“Smaller clients won’t have access to the same advice if [regulators] take away the different compensation models,” says an advisor in Ontario with Toronto-based Desjardins Financial Security Independent Network (DFSIN). “If you work backward from the math, there’s not enough money.”

“[Financial advice] would become very expensive for people, especially the smaller clients,” adds an advisor in the same province with Toronto-based HollisWealth Inc. “Millennials will use robo-advisors, but 50- and 60-year-olds will not. There will be a lot of orphaned people.”

Many advisors who were against regulatory action on embedded commissions also brought up the results of regulators in Australia and the U.K. taking similar action, such as the impact that such a ban had on clients with limited investible assets.

“The model that [the CSA] is proposing will not work for the average Canadian investor,” says an advisor in Ontario with Calgary-based Portfolio Strategies Corp. “If you look at Australia and the U.K., [a ban] didn’t help at all. Instead, it hurt the average investor terribly.”

Advisors also pointed out that a ban on embedded commissions not only will make access to financial advice more difficult for smaller clients, but such a ban also will prevent advisors who are new to the investment industry or who have smaller books of business from establishing themselves in the business.

“Commissions are there to help a new advisor survive,” says a DFSIN advisor in Ontario. “My first year in this business, I [brought in] only half a million [in assets under management]. If I didn’t have [embedded] commissions [on top of base pay], I would’ve made only $15,000.”

“I’m the guy with the little book, right?” adds a Portfolio Strategies advisor in Alberta. “Embedded commissions allow me to participate in this industry, and I provide great service to my clients, who would be talking to someone at the bank or using a robo-advisor [instead], which is no [personalized] advice at all.”

Even those advisors who favoured regulators taking some sort of action regarding embedded commissions were emphatic that their support does not translate to a ban on embedded commission models.

“I’m supportive of [regulators] examining [embedded commissions, but] I don’t believe taking them out is necessary or good,” says an advisor in Ontario with Mississauga, Ont.-based Investment Planning Counsel Inc.

The concerns some advisors expressed were far from being solely about their own compensation or survival in the business. Rather, they said that embedded commissions are tied directly to the unique services that advisors at mutual fund and full-service dealers – who focus mostly on mass-affluent clients – can offer in order to compete with the brokerage houses and banks.

“If [regulators] get rid of trailer fees, that’s going to make smaller clients unprofitable for the independent dealers,” says a HollisWealth advisor in Ontario.

“I know [regulators] say that the banks are there for these clients, but I would argue otherwise,” says an advisor in Atlantic Canada with Toronto-based Assante Wealth Management (Canada) Ltd. “The banks’ advisors have 1,500 clients [each], so [these clients] would get a cookie-cutter type of service. I just want people to get good, qualified help.”