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Wealth Professional | 19 Jul 2016, 08:15 AM Agree 0
The CSA’s recent proposal to remove embedded commission fees on mutual funds has been a divisive issue in the industry – and a potentially harmful one says financial services president
  • Peter | 19 Jul 2016, 10:39 AM Agree 0
    I for one see nothing wrong with "embedded commissions".

    As I have stated on this forum before, ethical advisors will always do what is in the best interests of their clients. Many times, I have spent a great deal of time doing work for which I did not receive any commissions.

    These regulators are obsessed with advisor commissions and trailer fees. Would these regulators please be transparent and disclose all of their salaries, bonuses and expense accounts to the industry!

    Perhaps these regulators should look at the fund companies / investment companies and ask why Canadians pay among the highest management fees in the world?

    Perhaps these regulators should turn their sights away from the advisors for a day or two and to the fund companies / investment companies and ask why Canadians pay among the highest management fees in the world? And why do the fund managers earn such huge bonuses when 90% of them do not outperform the benchmarks they are tracking?
  • Niki | 19 Jul 2016, 11:59 AM Agree 0
    Peter,

    Since they cannot touch the big abusers, they are going to stick it to the little guys and gals in the Industry--just because they can. I believe that what is going through their heads is that it is a difficult decision to make. They appear to be coming from a communist anti-profit perspective. At the end of the day, just because it is a difficult decision, does not mean it is the right thing to do. I do believe that this will create a fall-out as has not been seen in the Industry since 08/09. The ironic thing is that economic turmoil often results in people doing really drastic things as was seen. I had a colleague who attempted suicide. It was awful! He almost left behind his wife and children. I cannot imagine the fallout we are going to see and those who will be hurt. In effect, they will do wrong in the hopes that right will come.

    Hmmm.
  • Steve | 19 Jul 2016, 12:22 PM Agree 0
    Peter, If you are a good advisor, your clients will say you are worth every penny when they see all of your fees clearly and regularly.

    Regulators have been fully transparent for years... salaries, bonuses and expenses (and who paid them) are disclosed publicly (e.g. the Sunshine list). Try taking one out for lunch and see who has to pay.

    Fund companies charge high management fees in large part to cover these undisclosed commissions. Doing the math, it takes a few years of management fees (e.g. 2%) to recover deferred selling commissions (e.g.6%).

    The underperforming funds can pay their managers huge bonuses because they have large fees from the investors money they attract with these high commissions.

    Expose explicitly or eliminate embedded commissions and there is a better chance that the better managed funds would get the investors' funds...which is the point....Fairness to investors, particularly the ones that can be easily taken advantage of.
  • Andrew A. Riley | 19 Jul 2016, 01:27 PM Agree 0
    Nicely said Rino Agresti! Lets hope that common sense prevails and a system evolves that is fair to all, not just the high net worth individuals and thier advisors.
  • Joe Carpenter | 19 Jul 2016, 03:21 PM Agree 0
    I just attended an Advocis meeting that showed a roundtable meeting last November. The chair of the CSA was on the panel. Stricter Fiduciary Duties will be part of the removal of embedded commissions. As far as the CSA is concerned embedded commissions are the problem.
  • Niki | 19 Jul 2016, 05:36 PM Agree 0
    About 300 or so years ago, there was a crisis in Europe in regards to energy. Homes were heated with wood. So the powers that be required/demanded the engineers create a stove/chimney that was more efficient. So they did and they created the temp cast stove. There was a problem. And there was a solution. The number of stove-makers was not reduced as a result of problem identified and problem solved. Had that been a result, then fewer homes would have had access to these new stoves. Remember, the wood was hauled in by horses so the rate of burn mattered.

    Using this situation as a metaphor, the problem could be identified with wood which has a cost of service embedded into the cost of the wood. For example, the wood cutters wages were not explicit in the price of wood. Eliminating the embedded payment for the woodcutter in the purchase of the wood ergo would not solve the problem in the energy crisis in the same manor as eliminating the trailer fees being paid for in the price of the mutual funds to the FAs and dealers. The issue is therefore not one of a real problem, but of an interpretation. Since the powers that be hundreds of years ago did not see the woodcutter as the problem, we may extrapolate that the powers that be today do see the FA as the problem. So it is not really about fees at all--they just simply hate the Financial Advisor and aim to eliminate them. That is what happened in UK and AU as a result of their changes. And so it is what the regulators really want to do but are couching the problem in a way that speaks to the payment. Had the powers that be 300 years ago simply eliminated the payment to the woodcutter, and demanded them to go around and receive payment that was not embedded in the price of the wood--lets say directly from the buyer, then the woodcutter would have been eliminated and the problem with the energy crisis made that much worse.

    So the means do not justify the ends. No one hated the woodcutters. They, like everyone else, could not do the work without being paid. because they, like everyone else, have to eat. And why would they do the job without getting paid? Same thin, like I would not do this job without getting paid. And thing is, people have become accustomed to the perception that it is included. Therefore they thought they were not paying for it before--and by and large with the exception of a small percentage overall, those who have thought they have not paid before, will not decide to pay going forward.
  • Mark Matsumoto | 19 Jul 2016, 05:44 PM Agree 0
    Here are some of my navel gazing ideas and speculation of the future. It may be kind of like economics where some important things are assumed away, so I hope things don't unfold like this.

    It is disappointing that regulators don't realize what harm they will be doing to people who need to invest and to the whole independent advisor industry. I hope they mean well, but they're not helping.

    Killing the independent financial advice industry seems like a bad idea. People aren't as financially smart as you would think.

    Regulations may be good for me in the short term as many people and companies may get pushed out of business. I may pick up a couple new clients but I suspect that most of the business will go to the banks.

    I don't know if that is an objective or not. I don't know who the "regulators" are. Banks have the models that regulators seem to like. They have clients that line up to come see them in their offices. They have access to client's banking info so they can operate on a high volume, low margin business model where they can keep their "advisors" on low salaries. They have standardized advice and their costs are so far embedded and inter-twined that they don't have to show any "commissions".

    The future of the industry may be "manufacturers" with direct sales reps! It may work with some of the larger, better capitalized fund companies.
    The dealers may be eliminated! They are just the conduit for the regulators to get to the reps. The regulations are so costly, that dealerships and the branch system is making less and less financial sense. Eventually, reps may just get sales agent contracts with the fund companies which seems to make more sense.

    Regulators will be able to say that today's regulations have reduced fees but they will not be able to honestly say that they made a positive contribution to the public's "well being". I think that these changes will probably cause more harm than good. People will be much poorer for today's actions but it will be very difficult to measure what "could have been". Lost potential will not be acknowledged.

    Banks will be the survivors of the regulators. Bank "advisors" will continue to show non-financial people what funds are available and make them decide what to invest in. The majority of the public will end up with half a dozen, generic Canadian balanced funds made up of ETF's sold with low MER's (& high margins) and no one will be the wiser. The funds will be invested based on a percentage formula using ETF's, so no one has to manage the money. Just set up the computer and let it go!

    Shareholder value will not be an issue because no one will be "calling" the companies when they fail to deliver. It will just be "the market". No one is in charge. Everyone will have a piece of everything.

    I believe that "To err is human, but to really screw things up takes a computer". Computers will be running most Canadians' investments. Regulators are pushing the industry to this. Automated management with no one really in charge. What could go wrong?

    I expect that today's actions will significantly restrict the flow of new advisors into the industry which will in turn significantly reduce the value of my book of business if I ever have to leave the business.

    Current advisors should consider this when planning out their own retirement. Today's regulations will cause significant financial damage to the value of our books of business by reducing/eliminating potential buyers. There is a very good chance that our books of business will be worth far less than today when we want to retire because there won't be any advisors behind us to sell to.

    There may be some large investment advisory companies that will look like banks, but they will have to act like them to stay compliant and be able to work for next to nothing like the regulators would like. Therefore no real choice for the consumer.

    Don't count your book as a retirement asset unless you're leaving very soon!

    I was against the 60% increase in CPP premiums to increase CPP benefits. However, regulations will likely significantly reduce people's wealth, so they'll need the CPP. People will invest less and the investments will earn less because no one will be calling to tell them to save and they won't have anyone calming them down telling them not to take a loss. Therefore people will be poorer as a result of regulations and will be more dependent on the government ponzi scheme called CPP.
    I hope it doesn't happen, but that's the direction I see.
    Anyways, I should get back to work!
  • Brian Shumak, B.Sc., CLU, CFP, TEP | 19 Jul 2016, 05:47 PM Agree 0
    To those who have commented and those who have read and stayed quiet, the key points to remember is doing what is in the client's best interest whether regulated to do so or not.

    With that comes offering the consumer a choice between paying a fee or paying a commission. I fail to see why there has to be an absolute versus offering the choice.

    If you want to regulate and mandate something, then do so in the disclosure that a consumer receives in advance of making an educated decision. This is what CRM2 is all about, isn't it?
  • Anom | 20 Jul 2016, 08:05 AM Agree 0
    Most MFDA and IIROC advisors that I have encountered are fully transparent about commissions, no matter if they are recomending embedded or fee based imvestment solutions. The ones that are not would simply start selling seg funds if this were to happen. This just hurts the MFDA advisors, clients under approx $500K in AUM (or clients that larger fee based advisors ignore) and will help the 'big banks' as clients are forced to meet an FP at a bank branch, who is a different person every two years and puts the clint in that banks own proprietary fund lineup.
  • Kathy Waite Your Net Worth Manager | 20 Jul 2016, 01:34 PM Agree 0
    Mark Matsumoto , interesting how you see this impacting the value of your business sale at some point. We have been looking for advisors selling to buy a book and can't find any one. They seem tot think they can just do the minimum for clients and collect the trailers or have managed their own finances so badly they can't actually afford to retire any way . Any one looking to retire ? Young advisor in Saskatchewan will buy books outright or for a % over several years if you only wish to semi retire.
  • Paula MacMillan | 20 Jul 2016, 04:15 PM Agree 0
    I agree that there should be stiffer penalties for those handful of dishonest and self serving advisors. Maybe there should be a law passed that you cannot DSC money that is NREG and for people over a certain age. I work for a company that has set in place some very strict rules around DSC use including age, amount and that fact that we cannot roll DSCs over and over - one time, that's it. I have always maintained an open discussion with clients on what DSC is and when and why I would advocate using it. NO ONE has ever argued that I should get paid, they just want to understand. It is the same with embedded commissions. The general CDN public just have not had it explained to them and they aren't sure if they are being taken advantage of or not. The rules NEED to change, but this is NOT the way to do it. In the UK when this happened, 40% of financial advisors left the business and left many clients without help and most that were hurt were smaller clients who will end up at a bank with little to no advice. There is a CLEAR trend now in Britain that this was a mistake. Our regulators need to take a page, take a pause and take a good hard look at what they are actually trying to achieve here. MOST ADVISORS are in the business to HELP Canadians. We don't need less of us in the business just less crooks.
  • Gerry | 22 Jul 2016, 11:12 AM Agree 0
    if regulators really care about the public and I assume that's who they want to protect then let' default all investment proffessionals to be licenced under IIROC ONLY. That includes FINSCO. Partial licences to perform partial financial plans with limited liabilitry must end. There are massive conflicts of interest everywhere. Stop taking adantage of client's lack of knowledge. Default to the toughest licence for the good of investors. discount brokers, like in the U.S., should go back and abide by the KYC rules too.
  • Niki | 22 Jul 2016, 03:05 PM Agree 0
    Gerry--you hit the hammer on the nail spot on!
  • Kevin CFP CLU | 24 Jul 2016, 09:08 AM Agree 0
    Well said Paula . The issue here is that there are to many so called dealers out there that don't manage their relationship of the advisors that put business through them . Set out clear rules that will protect the client and when the rules are broken it results in real and meaningful disciplinary actions.
    I say that all products have embedded cost or commission associated with them . Redeemable GIC = FEL 0% mutual fund . Non-redeemable GIC ( Market value adjustment if cashed out early ) = DSC mutual fund ( fee if cashed out early ) The regulators should now start regulating the banks on their Non redeemable GIC business to people over the age of 65 . Car salesman , furniture /appliance sales , real estate , etc. all have commissions or bonuses . Head of the big banks and big insurance companies get commission if they meet their targets ( share options. bonus to base salaries )
    The financial services business and the sales people in it are aging and there is a shortage of new blood coming in to it . A lot of new advisors are struggling and the stats prove it . Less than 30 % make it past 5 years . Banning embedded commissions will not help this issue.

    Bank and insurance company salaried employed advisors will be the result of the regulators regulating this industry to death !!!
    Everyone need to be paid to work done . Do you want to be paid a commission or earn a salary with maybe a bonus .
  • Jim | 24 Jul 2016, 10:15 AM Agree 0
    I believe the regulators should focus on advisor training and education. It is interesting that advisors have to make commission transparent but their backgrounds and qualifications can remain hidden from the public. We need some standards to identify qualified financial advisors.
  • Bruce R | 24 Jul 2016, 11:58 PM Agree 0
    The CSA crm2,3,4,what ever is needed to drive small dealer and advisors out of the market one way or another into the arms of the bankers is an elitist agenda.

    The forums for professional client relationships will change with technology and new innovations for financial areas.
    This will eliminate these elitist financial agendas and return more decentralized networks for profession advisors after various coming resets.

    The Chinese already have more super computers than the US. Things will change form the East.
  • john | 25 Jul 2016, 12:41 PM Agree 0
    Would it not make sense to have both, but we as advisors have a duty to introduce to the client an embedded option or what our fee tiers are and leave it up to the client to decide if they want to be embedded or pay the fee?
  • Bob White, CLU | 25 Jul 2016, 06:30 PM Agree 0
    The focus is not on DSC fees as Steve discussed.

    It is on embedded compensation. Yes compensation, (NOT commission) Commission means every one should get paid the same. We do not, as it is paid to the dealer, and we get paid on a grid based on the relationship and productivity with the dealer.

    If you compare apples to apples embedded of a fee for service model, (F class funds) then there is a little bit lower MER on the F class, But the dealer states the minimum fee for a fee for service account. So if the minimum annual fee is $1,500, as in my case, then the minimum household accounts need to be $150,000 otherwise the fee % increase, and the embedded fee is a better cost.

    It is not rocket science, the regulators do not know how to look at the simplicity of what is being proposed and the affect it will have on mom and dad Canadians.

    The are only about 3% of all advisors on a fee basis, meaning you are going to pay $250 -$500 per hour and have no compensation from the product. The effect of that is add GST PST or HST to the fees, Sell some of your investments to pay the fees, and trigger taxable gains.

    So, compared to the way if has been done, (not perfect, but pretty darn good) the client will have less money at the end of the day because the costs are higher, and, millions of Canadian's will no longer get financial advice, because they will not pay for it. As such they will have less assets when needed, and the government will require bigger purses to supplement retirement and health needs.

    Basically you need your MLA's and MP's getting on board and telling regulators they are not going to allow them to abuse Canadians in this fashion.

    Regulators do not care! If they did they would have many people for our industry who are front line providers on a panel to discuss these issue in an intelligent fashion and look at the plus and minus effects of the proposed changes.

    They need to take example from the BC insurance council who have done a first class job in managing what is good for the consumer, and interesting in the last 2 years only 2 cases in litigation.

    But they have a method of practice, not 1,000's of rules no one can remember and implement in a reasonable fashion (most of which do nothing to protect or benefit the average Canadian).

    We need to change thee process, and some of the language around Compensation, have disclosure around compensation. but do not tell Canadians that they can not have a say in how they pay for the services they receive.

    We are still a democratic society, not a dictatorship, and not a communist society, but the big brother regulators are going way beyond the value they are meant to bring, and we the advisors need to communicate at every opportunity that this is not good for all those concerned.

    Strength is in the numbers, Advocis is the voice for not only its members but non members benefit as well, but, when I spoke to a client who is an MLA his comment to me was about the number of Advocis members vs total Advisors in BC. Basically why are mot more advisors a member of a professional organization like advocis? So my Question to you non members, Why? there are no other professional advisor organizations who are like Advocis, but more importantly member number bring value. If you have 30 or 40,000 advisors shaking there fist, saying no to the MP's and MLA's, they will have to stand up and tell the regulators to back off, "you are harming the economics of our provinces and our country.

    Stand up for your clients, your staff, your families and your self. If we do not, then we will become the proposed title "mutual fund sales person"

    Bob White, CLU
    Member of Advocis since 1976
  • BanPart Timers | 26 Jul 2016, 12:32 AM Agree 0
    would be more helpful if regulators implemented a rule that you cannot be a part time advisor .. i.e. shut down WFG and Primerica advisors who have a full time job and are advisors on the side
  • Jim | 26 Jul 2016, 09:10 AM Agree 0
    I think it would be challenged. I believe that we should be free to do what we wish without being regulated. But I do believe that advisors should be required to have the training and the education to provide financial advise or to hold themselves out as advisors. One does not need much training or education to call themselves a financial advisor and that is not fair to the public.
  • Niki | 26 Jul 2016, 11:27 AM Agree 0
    Imagine if someone's FA worked full-time picking up garbage... . I believe that it is irresponsible for the Industry to permit FAs to be called the same thing when they only work evenings and or weekends.
  • Niki | 26 Jul 2016, 11:29 AM Agree 0
    Oh, and FAs should at least going forward, have a recognized University Degree.
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