Vanguard Canada’s MD speaks out on embedded commissions

The debate on embedded commissions has been passionate, and often heated, ever since the CSA released its consultation paper in January

Vanguard Canada’s MD speaks out on embedded commissions

The Canadian Securities Agency’s proposed ban on embedded commissions has certainly ruffled feathers within the advisory community. The debate between advisors, portfolio managers and investors has been passionate, and often heated, ever since the CSA released its consultation paper in January.

The debate shows no sign of abating and, if anything, talk around the impact of a potential ban has increased as time has passed and the news has settled in.

For one of the industry’s big players, there is a little doubt around how the issue should play out. Vanguard Investments Canada, which manages more than $12 billion in Canadian domiciled ETFs, fully supports the ban.

“We feel that low cost investment vehicles are one of the most important factors in giving investors the best chance to achieve investment success,” says Atul Tiwari, Managing Director at Vanguard. “How do you get investors invested in low cost, high quality vehicles? One of the ways is through transparency.”

In forcing advisors to transition to fee based models, Tiwari believes a ban on embedded commission would lead to more transparency, greater competition and reduced prices in investor portfolios. Vanguard has been operating in Canada for six years and during that time Tiwari has noticed an increased awareness around fee based strategies and more willingness to transition to fee based practices.

A 2016 survey conducted by Vanguard found that 76% of advisors believed changing to a fee based practice would be beneficial for their clients and 83% thought it would be of benefit to themselves.

“A lot of advisors and brokerage firms are looking at what is going on around the world and taking their own view that a fee based practice is going to be better for them and their clients,” Tiwari says. “We’ve seen growth in this area during the time we’ve been here in Canada and a ban on embedded commissions is only going to accelerate that growth.”

In U.S., the majority of advisors have aleady switched to a fee based model, a trend which occurred organically and was borne out of a desire to differentiate from the competition. However, in the UK and Australia regulators stepped in and banned commissions, just like Canada is trying to do. As well as including a ban on embedded fees, the UK’s Retail Distribution Review (RDR) included a number of proficiency requirements, upgrades and standards that advisors had to meet in order to keep their registrations, which led to many advisors leaving the industry.

It’s a little early to predict how exactly the proposal will play out in Canada, but Tiwari is hopeful it will be resolved in a reasonably timely manner. The CSA received a huge amount of submissions from the industry and will host a series of roundtables for people to voice their opinions in a public forum. If the ban does become a reality, ensuring a smooth transition and implementation will be a top priority for the CSA.

“If the ban does come into action, it makes sense to have a transitionary period in which existing trailing commissions are grandfathered for a short period of time,” Tiwari says. “It will be great for us to have some certainty on this, so that the industry can know the roadmap and align to whatever comes from the consultations.”

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