After the U.K. and Australia announced plans to ban commissions roughly a decade ago, Canadian financial advisors often asked whether Canada would follow the same path. My response then – which I summarized in these pages in the autumn of 2010 – was that choice and true transparency were preferable.
Six years ago, I devoted a column to warning that the industry would face a commission ban if it didn’t voluntarily become more transparent and client-centric.
And in my submission in December to regulators on the latest consultation on the proposed changes to National Instrument 81-105: Mutual Fund Sales Practices, I supported its three key proposals to eliminate deferred sales charge (DSC) commissions; end the practice of discount brokers collecting trailing commissions; and raise the standard for resolving conflicts of interest.
The industry’s best arguments against banning DSCs make for a good framework to summarize my position on this issue. The Investment Funds Institute of Canada’s (IFIC) submission argues that DSCs remain appropriate for “certain investors” and “strategies.” It uses the example of investors with small amounts to invest periodically and who also want personalized advice. Paying a fee on a $25 monthly investment just isn’t economical, states the submission. But there are two problems with this argument.
First, no investor of this size needs highly personalized advice. These investors can benefit from proper financial direction, which, for those early in their earning years, is to focus on debt, cash-flow management, and disability and life insurance.
Insurance products continue to pay advisors handsomely, even without any investment-related compensation.
Second, I can’t think of one advisor who is aching to win a client with all of $25 a month to invest. The maximum DSC plus trailing commissions on that hypothetical client is less than $16 for the first year; and not much more for years afterward.
Don’t get me wrong: investing any amount as soon as possible is important. But the industry doesn’t want this type of client.
IFIC’s submission goes on to argue that there is good disclosure of DSC funds, both pre-sale and in annual reporting. Ironically, however, the industry now uses disclosure requirements as a reason to keep DSC commissions, even though the industry fought such disclosures.
Finally, we have the oft-cited “advice gap.” Many industry folks claim that eliminating DSC commissions will make accessing financial advice harder for Canadians. I see two problems with that argument.
The DSC commission structure was not created to broaden access to advice. On the contrary, DSCs were created to benefit mutual fund sellers – that is, advisors – because of lowering front-end commission rates on mutual fund sales. Front-end loads, once as high as 9%, were on the road to zero when the DSC was born to preserve generous, upfront commissions for mutual fund sales.
I have always believed in the value of professional advice – and I do now, more than ever. But the industry’s arguments lack merit, in my opinion. The financial advisory industry needs to think about what being a client is like, and remember the adage: “Take care of clients and they will take care of you.”
Dan Hallett, CFA, CFP, is vice president of Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.