Why a ban on embedded commissions would hurt smaller portfolios

A Canadian advisor explains how the CSA’s proposed ban would negatively impact the middle market of client portfolios

Why a ban on embedded commissions would hurt smaller portfolios

With the consultation period on the CSA’s proposal to ban embedded commissions coming to an end this week, insiders from all areas of financial services are scrambling to get their submissions complete. Rarely does an industry issue cause so many people to speak out and lobby for what they believe in. Advisors want to have their voices heard and the CSA should be expecting a deluge of responses.

Christopher Dewdney’s staunch opposition can be attributed to one fundamental point: choice. “I don’t think a ban helps anyone, either advisors or consumers,” says Dewdney, who is an advisor and principal at Dewdney & Co. “I propose that clients should be able to choose a compensation model that fits their objective - whether they would like the embedded trailer commissions or upfront fee for service should be up to them.”

Dewdney believes that any potential ban would have negative consequences for the middle market of portfolios in the $50,000 to $100,000 range. “High-net-worth investors usually tend to use a fee for service model for various reasons, but, for the person with a smaller portfolio having to cut an advisor a cheque for their services is going to put them in a difficult situation,” Dewdney says.

If the ban were to become a reality, Dewdney is in no doubt that it would have significant ramifications for the industry and how advisors run their businesses. “I believe a lot of the advisors would either exit the business, as we’ve seen in the UK and Australia, increase their costs or just focus on the larger sized portfolios,” he says. “Either way, that middle market of smaller portfolios would be in a loss position.”

Dewdney identifies the global financial crisis as being the genesis for the current fee furore here in Canada. He puts it down to the “bad guy” image that was attached to Bay Street and advisors in the aftermath of the Great Recession – an image that the industry is finding it hard to shake off.  “From a political standpoint, it looks good for the CSA to be pushing the ban because they are seen to be looking out for the little guy and being tough on the financial advisors,” Dewdney says. “But if you look at the data related to what has happened in the UK and Australia, you can clearly see that the ban was of no benefit. In fact, it was a direct and negative hit to the industry.”

If the regulators do get their wish and there is an exodus of advisors from the industry, Dewdney believes there will be one major beneficiary: the big chartered banks. “Ultimately, clients would drift toward one of those institutions,” Dewdney says. “I just don’t think there is an issue with the current compensation model. If people do have issues with it, surely the best solution should be to have choice. Investors shouldn’t be mandated one way or another.”

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