In a recently published post on the Vanguard Investments website, Head and Managing Director Atul Tiwari said that while there are signs of regulators looking to pull the plug on trailer fees, financial advisors should not be concerned about the payment system’s possible demise.
“Since mid-2015, the Canadian Securities Administrators (CSA) has released two reports [that collectively review fees, their impact on performance, and potential conflicts of interest] commissioned by the Ontario Securities Commission,” Tiwari observes. “And this June, the CSA announced that it plans to seek public comment on a potential ban on trailer fees and other embedded commissions in the mutual fund business.”
The Vanguard Investments head also acknowledges that “given how common trailer fees are in the mutual fund industry, any hint that commissions may be limited (or even banned as in the United Kingdom and Australia) naturally raises alarm bells from advisors.”
However, based on reports from Vanguard associates in the UK, he reports that shifting to a fee-based model can allow advisors to thrive well in case of a commission ban. Additionally, in a survey of advisors conducted by market research firm Ipsos on behalf of the firm, 83% of Canadian respondents indicated that a fee-based model was better for their practices than a commission-based model. The same survey had 76% of respondents saying the fee-based model was better for their clients.
For Tiwari, CRM2 heralds a fundamental shift in the advice business. Advisors will have to be able to articulate and demonstrate the benefit of their service to clients, which would entail more relationship-oriented guidance rather than trying to beat the market. In his view, switching one’s practice model to a fee-based approach is one way to embrace that change.
“For advisors now, a ban on commissions is not inevitable. But it's clear that clients will begin paying more attention to investment costs. It's also possible that new service models will emerge and gain prominence to serve particular needs. But to focus only on whether commissions ought to be banned or maintained completely misses the sea change going on in financial services,” he emphasizes, asserting that giving in to the tide “can turn out much better in the long run.”
CSA propose ban on trailer fees, embedded commissions for mutual funds
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