Opinion: Commission bans would harm Main Street

Opinion: Commission bans would harm Main Street

Opinion: Commission bans would harm Main Street



The total cost of owning a mutual fund in Canada is already fully disclosed and transparent in the Management Expense Ratio (MER). Embedded fees enable individual consumers to compare the total cost of owning various funds. In contrast, U.S. investors pay a misnamed “Total Expense Ratio” (TER), which does not incorporate the separate fee for advice that is typically paid directly to the advisor.

There is no regulatory requirement in the US to publicly disclose the advice fee. As a result, a US investor knows what s/he is paying for advice but has no way of knowing whether the total costs (TER plus advice fee) are consistent with amounts paid by other clients of the same firm, and no way of comparing total costs against what other firms charge.

Another attribute is the strength of Canada’s regulatory environment. Our disclosure regime is already superior to that of any other country, and it will soon be even stronger with recently announced changes to Fund Facts, as well as the full implementation of new Client Relationship Model rules, known as CRM2. Fund Facts will give fund purchasers a four-page summary of key information including costs, risks and fund holdings, all written in plain language.

Under the new CRM2 requirements, investors will receive an annual statement that explains how their investments performed and what they paid to their dealer. This will equip investors to have much more robust discussions with their advisors about the costs and value of their services.

Banning embedded fees just as we embark on a new enhanced disclosure regime seems premature. A more prudent approach would be to complete the implementation of the new initiatives, and allow some time to determine whether they are meeting the intended public policy objectives.

Major public policy changes can have unintended consequences. Following the ban on embedded commissions in the UK. a number of major banks and insurers cut their branch advice arms. Santander, AXA UK, HSBC, Barclays, Lloyds and the Royal Bank of Scotland are reportedly leaving the mass market because small accounts are not serviceable in a fee-for-service market.

HSBC has withdrawn advice to customers investing less than £50,000, or almost $80,000 Canadian. The move is causing significant layoffs: these banks have cut several thousand advisors from their staff in the past few months. As a result, smaller investors will experience an advice gap while fee-for-service advisors focus their attention on high-net-worth clients.


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  • John Rathwell 2013-07-04 9:16:24 AM
    If the government removed the embedded commissions I would have to lay off staff and stop taking smaller accounts. My clients don't complain now about fees, and this whole issue is going to create more harm than good.
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  • Isaac 2013-07-10 10:42:40 AM
    Imbedded commissions has as much effect on the value and effectiveness of a financial advisor's advice as the dental fee guide has on getting a good filling or a bad root canal. If the regulators want to protect the public from bad advisors, raise the entry requirements to the industry, educate consumers on best practices & increase disclosures.
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  • Peter B 2013-07-23 3:49:07 PM
    Embedded commissions are deceitful and dishonest. Transparency is the hallmark of ethics and perhaps some of the so called "Advisors" who lament removal of these fees will destroy their businesses should look at transactions from a Customers' perspective; Perhaps they would actually like to be informed of the fees their "impartial" Advisor is earning... better still - negotiate those fees. The old days of hidden and under-ther-counter commissions are gone - not recently either - long gone. Those who do not evolve will be put out of the industry - and for good reason. As Regulators struggle to grasp the impact of legislative measures to control the industry, the opportunity to self-regulate is almost lost - due to the bloody-mindedness of the last Brigade....Never ind they will all drift away, replaced by a new breed of professional fee-for-service Advisors who are not afraid to rely on their skills to provide long-lasting solutions to clients.
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