A portfolio manager’s view on the ban on embedded fees

John De Goey hits back at Advocis’ stance on the CSA’s plans to ban embedded commissions

A portfolio manager’s view on the ban on embedded fees

After the President and CEO of Advocis, Greg Pollock, gave his views on the CSA’s plans to ban embedded commissions within mutual fund products last week, WP received a barrage of emails and calls from advisors and portfolio managers eager to speak out on this contentious, polarizing issue.  In this special guest article, Portfolio Manager with Industrial Alliance Securities Inc., John De Goey, outlines his response to Advocis’ view point.

"In essence, Advocis believes that the proposed discontinuation of trailing commissions would be detrimental to both advisors and their clients. The organization also claims to be in favour of choice and transparency. I’d like to respond to these positions with my own comments – and by asking Advocis to answer a few questions…

Making compensation transparent does not do anything to change pricing. Four quarters does not cost more than a dollar; not liking having to pay separately does nothing to change the quantum of payment.  Why does Advocis continue to suggest that transparent advice is somehow less accessible to investors of all account sizes? 

The experience of the Retail Distribution Review (RDR) in the UK shows that once embedded compensation was no longer an option, advisors moved quickly to recommending lower cost products to clients. This is a real world experience that showed all investors paid less after the switch. This was clearly a win for consumers. Why doesn’t Advocis mention it?
Investors pay for the sum of both products and advice. Why does Advocis only talk about the cost of advice and not the total?
Advocis says the number of advisors would drop if embedded compensation was no longer an option.  I favour high standards/good advice and am opposed to low standards/questionable advice. The consensus is that it was overwhelmingly the less able advisors that left the business in the U.K. because they couldn’t meet new (higher) proficiency requirements. Does Advocis want such advisors to continue in business? Is Advocis suggesting that every single advisor has unambiguous utility?
The Brondesbury and Cumming Reports showed that embedded compensation causes advisor bias. This bias, in turn, is extremely harmful to investor outcomes.  Meanwhile, Advocis says almost nothing about evidence regarding advisor bias. Is Advocis unconcerned about the harm it may cause? If not, then what, exactly, is the Advocis position about the demonstrable harm caused by the bias that is part and parcel with embedded compensation?
Richard Thaler has done important work to show that people can be made better off by reducing their choices.  By being “pro choice” Advocis implies that it merely favours maximizing retail client options.  However, if the additional ‘choice’ on offer is shown to be sub-optimal, wouldn’t they agree that removing the worst option can actually improve the universe of possible outcomes?
Many people have long thought financial advice was free. Similarly, many people fear that CRM II statements (which often go unread) still allow some clients to delude themselves into thinking advice is free. As strong proponents of transparency, wouldn’t Advocis agree that a separate, itemized bill is more transparent and therefore more desirable than a yearend statement that can easily be misplaced, misinterpreted or missed altogether?
Finally, it should be acknowledged that Advocis does not speak for all advisors. For instance, I have long advocated for transparent, professional financial advice. Will Advocis be clear in future articles and comments that there are a number of advisors out there who are opposed to their stated views?
I would prefer that Advocis’s responses be rooted in demonstrable causal facts. For instance, Advocis has often suggested that the drop in the advisor population in the UK was due to the elimination of embedded compensation, while it is widely believed that the primary culprit is higher proficiency standards.  Correlation is not causation… and a little truth and clarity in lobbying would be nice."

John De Goey is a Portfolio Manager with Industrial Alliance Securities (IAS).  The views expressed are not necessarily shared by IAS.

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Commission-based clients may not want to switch