CSA invites comments on proposed embedded fees ban

CSA invites comments on proposed embedded fees ban

CSA invites comments on proposed embedded fees ban

A new consultation paper from the CSA is making waves throughout the financial advice industry, according to the Financial Post.

The paper outlines the mechanics of a possible ban on embedded commissions and trailer fees; it also examines possible positive and negative effects of such a move. The consultation period has been set at 150 days, far longer than the usual commenting period.

“To address the investor protection and market efficiency issues that have been raised regarding embedded commissions, we believe that transitioning to direct pay arrangements must be considered and evaluated,” said CSA Chair and President Louis Morisset, who is also CEO of the Autorité des marchés financiers. “This is a consultation process, and we are mindful of the need to carefully assess potential impacts before making a decision.”

The elimination of trailer fees has long been mulled over by the watchdog group, which has gathered evidence since 2012 to suggest that such a payment scheme introduces conflicts of interest and market efficiency issues. The current consultation paper also says that embedded commissions reduce investor awareness, understanding, and control of dealer compensation costs. To protect investors, therefore, a more transparent compensation system that charges fees upfront has been suggested.

Some have contended that making investors pay fees upfront could have a chilling effect on the industry. A University of Calgary study has found that investors tend to balk at such fees, leading them to make their own financial decisions, which tend to be “sub-optimal” and ultimately detrimental to Canadians’ retirement prospects, the paper said.

OSC Chair Maureen Jensen has taken a contrary stance, asserting that the current compensation model where fees are set by the fund manager to incentivize sales is not acceptable. “This does not put the investor’s interest first, and that’s a fundamental flaw that needs to be addressed,” she said in a speech last September.

While fee-based compensation has been the most widely discussed alternative to embedded commissions, the CSA has suggested other measures, including “upfront commissions, an hourly fee, a flat fee, a fee-based arrangement, or another suitable compensation arrangement [that is not embedded and is paid exclusively by the investor].”

Positive effects seen from this ban include the introduction of new lower-cost product providers and distributors and better alignment between the costs investors pay and the service they receive from dealers and representatives. Negative effects include possible reduced willingness among lower-wealth investors to seek financial advice and decreased choice in how investors pay for financial advice.


Related stories:
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Proposed ban on embedded commissions not justified, says IFIC
Potential conflicts of interest in compensating representatives discovered
 

4 Comments
  • Tony Battista 2017-01-11 2:05:07 PM
    Those who want to remove embedded fees are wrong and do not understand a large part of the industry. they should concentrate on standardizing fees and commissions for each class of funds. By eliminating embedded fees the small clients,the beginners, the young clientele will be hurt the most. Do not forget that the work of the financial advisor goes beyond the sale of the mutual funds.
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  • Paula MacMillan 2017-01-11 3:51:15 PM
    Agreed. There is a VALUE to advice and it has been PROVEN in the UK (for example) that this did the average Brit citizen no favours and forced 30% of advisors out of the business. There have been admissions from regulators in the UK that maybe they went too far. Investing is tricky business and when left to MOST individual investors to do on their own - disastrous. I have had three new clients in my office since the beginning of 2017(!) who have been doing it on their own and have 'had enough' and 'don't like the pressure' of knowing too little or making the 'wrong choice at the wrong time' not to mention the fear of an investment decision costing them tax wise. I urge regulators to listen to CDNs and ask them what they want - do it on your own or pay an advisor? I have explained how my company/dealer and my own corporation are compensated to clients for year. I think that the answer to the issue is more education of consumers, not less advice. Every client (EVERY ONE) whom we have shown how we are compensated asks the same two things: "that's it?" and "why did my other advisor never explain this to me?"
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  • 2017-01-12 10:59:29 AM
    It seems that regulation has gone too far and is causing real financial damage to many average people.
    It has put most small mutual fund dealers out of business and it is aiming on advisors that target average people out of business as well.
    What they say is much like Canadian policy in general, where Big Brother tries to protect the very few, Darwin award candidates from themselves.
    Government intervention is generally bad news. Regulations are government intervention.
    I don't see how raising "compliance costs" through the roof, putting so many people out of their jobs and eliminating options for average, middle class people is on the right path. It as though the people inventing these rules have a single focus, a single lens and refuse to see the bigger picture or alternatives.
    Their next job will be to work against the monopoly and oligopoly business structures that will result.
    I am fortunate enough that my business is relatively stable and I expect to change my trailers to fees. Smaller clients will receive less service. I may have to transition out of funds and move to a fee based service, but I think I have a bit of time.

    I think that the majority of good advisors will change careers to ones where compensation is in line with education requirements. The overall level of advice is likely to decline.

    Regulators don't seem to know about basic economics of supply and demand! Maybe because it is not measured or because it is part of the big picture, but they seem to be missing it. If they force up costs and eliminate income, then supply is reduced. There cannot be perfect competition because they have installed very high barriers to entry.

    I hope they don't regulate us out of business. It will cause big hurt to everyone.
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