Embedded commissions on last legs

Embedded commissions on last legs

Embedded commissions on last legs Industry source suggests a statement from the CSA regarding trailer fees is coming soon.

For those unfamiliar with the history of this very controversial subject it began with a discussion paper published by the CSA in December 2012 that sought feedback from all the stakeholders in the industry about reforming compensation on the sale of mutual funds.

This feedback led to the CSA issuing request for proposals in April 2014 seeking research into two specific areas:

1. To what extent sales and trailing commissions influence fund sales; and
2. How the use of fee-based vs. commission-based compensation changes the nature of advice and investment outcomes over the long term.  

The RFP deadline was May 5, 2014. In November, information requests went out to the CEOs of mutual fund companies operating in Canada asking them to voluntarily participate in this survey. That data was expected no later than January 16, 2015. Schulich School of Business finance professor Douglas J. Cumming has taken this data and is preparing a research report for the CSA based on his findings.

The bombshell here isn’t that the report will be out by the end of March – that’s public knowledge and contained within the CSAs two-page letter to fund company CEOs.

No, the big news according to our source:

“Concurrent with those reports being made public will be some sort of announcement that effective on some future date, embedded commissions will no longer be available in Canada. They’ve already been banned in a number of other jurisdictions. The regulators [might] actually act this time.”

WP reached out to Michelle Alexander, IIACs expert on embedded fees. We asked her when advisors can expect a decision.

“They’re now saying spring,” says Alexander. It’s taking a while to get some of the raw data… It’s a question of what the research shows in order to decide what options are available to them. I don’t think they’ve made a decision at this point.”

The second quarter appears to be a more realistic timeline. For now advisors can only wait.
  • Harley Lockhart CLU CHFC 2015-02-04 1:20:51 PM
    Your article is correct that embedded commissions have been eliminated in several international jurisdictions. However the title of this article is highly presumptuous and serves no purpose other than sensationalism.
    The conditions that resulted in banning commissions in other jurisdictions simply do not exist in Canada. There has never been any hard evidence that consumers who deal with commission based advisors receive less robust or more biased advice than fee based professionals. A principal in Canadian Law is innocent until proven guilty. Where is the proof?
    One fact that seems to be overlooked in this irrational attack on commissions is that, while there are licensing requirements to receive commissions, there are NO REQUIREMENTS AT ALL to hold oneself out as a fee-based advisor. How does that improve consumer protection from unethical behavior?
    Currently, if you believe the press, Canadians have access to both fee and commission based advisors. Other than hype and self-servicing innuendo, what evidence supports removing this choice from consumers?
    Based on my experience and connections with practitioners in financial services across Canada, I believe the number of advisors supported entirely by fee income are significantly exaggerated. Before throwing the industry into disruption, it may be helpful to have some hard facts to identify what the real number is. In addition, what is the profile of those investors who CHOOSE to deal with fee-based advisors, compared to the demographics and financial resources of Canadians who CHOOSE to have their advisor compensated by commission?
    This issue is, most importantly, not about my business model, but it is about what is best for the consumer. Nevertheless, by way of disclosure, all my new clients are given the choice. We are working through our database to make the offer to existing clients. So far the CHOICE has been heavily weighted to commissions.
    If change is needed, by all means we should change but to mimic change from other jurisdictions, that created significant disruption and from most reports loss of access to advice,
    let's be sure to justify the change with a clear unbiased examination of the facts.
    Post a reply
  • Will Ashworth 2015-02-04 3:15:34 PM
    Great comments, Harley. You do a good job keeping us honest.
    Post a reply
  • Kathy Waite Your Net Worth Manager 2015-02-05 12:28:03 PM
    Hello Harley , you say : So far the CHOICE has been heavily weighted to commissions.

    Out of interest could you share with us why do you think clients are choosing commission over a fee? is there a pattern, smaller clients choose commission as the fee would be a large % to them ( inability to cut a cheque ) and large accounts chose fee as it a fixed amount and doesn't increase as their account increases? As mentioned before I am just in favour of choice and transparency so Kudos to you offering people a choice and joining the conversation. 95% of the population spends more time shopping for a car than reviewing their investments
    Post a reply