With CRM2 still ringing in the industry’s ears, the Canadian Securities Administrators have launched Consultation Paper 33-404 about best interest standards, conflicts of interest, embedded compensation, titles and other obligations of advisors, dealers and representatives towards their clients. With that in mind, what will investment advice look like in five years?

Read: What the CSA’s bombshell proposals mean for you

Knowledge gap 

Increasing investment complexity has widened the gap between what the average investor understands and what the industry offers. In theory, this “information asymmetry” is balanced by disclosure (via prospectus), a knowledgeable advisor, and securities rules and regulations to make things fair.


But few investors read prospectuses, which are written by lawyers for other lawyers and meant to protect issuers. Advisors and planners, to the extent they are compensated by product providers via trailing commissions or selling concessions, may have a conflict of interest, leading to expanded regulation.


Aligning advisors’ interests with those of investors is most effective at protecting investors (see Chart 3). Some insist these interests are already aligned, but many industry practices rely on advisors’ goodwill, ethics and honesty. For whatever reason, securities regulators do not trust this approach. Consider that the Consolidated Ontario Securities Act, Regulations and Rules with Policy Statements, Blanket Orders and Notices has grown to 2,960 pages in 2016 from fewer than 270 in the late 1970s. Investors may be safer today, but by how much is debatable.


Status quo advocates insist investors will not be able to afford the important services of advisors and planners if commissions are banned, which will harm the general public. A 2016 University of Calgary whitepaper, “A Major Setback for Retirement Savings: Changing how Financial Advisers are Compensated Could Hurt Less-than-Wealthy Investors Most,” argued just that.

Indeed, the whitepaper found advisor numbers dropped in the U.K. and the Netherlands after commissions were banned — presumably, because clients couldn’t afford their hourly or contract services. In the U.K., advisors fell from over 40,000 in 2011 to 31,000 in 2014; the number of advisors dropped 20% in the Netherlands by 2014.

But while many point to this as an example of lowered advice access, that may not be the full story.

How many advisors retired rather than retrained? What is the possibility that expertise and professionalism have actually risen? Culling lower-performing players in any group leads to an improvement in the average of those remaining. Banning commissions may lead to such a cull.

Investment services are unbundling. In theory, consumers can better evaluate their savings and investments with more information. But the mere act of having an advisor isn’t enough to confer benefits (Edesess, Tsui, Fabbri and Peacock have argued that DALBAR studies are flawed). Instead, it’s having an unbiased, affordable advisor who integrates tax, estate and financial planning that can actually lead to being well informed.

Read: Clients say their advisors fail on goals-based investing

Traditional players may dismiss the need for a best-interest standard, but the reality is simple. An aging population has not saved adequately for retirement, capital markets are far more complex, and the historical returns upon which financial plans have depended are not in sight. Clients need advisors who are looking out for them or online systems that can fill the gap.

The future

Professional advisors continue to put client interests before their own and declare all conflicts. Conflicts of interest can be avoided by rebating any compensation arising to the client. Simple disclosure is not good enough because clients may feel guilty denying the advisor compensation, as found in the Journal of the American Medical Association study, “The unintended consequences of conflict of interest disclosure.”

Here are some principles to drive the discussion:

  1. Compensation drives behaviour, so encouraging advisor remuneration that promotes client interests first is preferred to disclosure alone.
  2. The most effective policies will change advisor rather than client behaviour.
  3. What gets measured gets attention, so if advisors and their firms are scored on costs, expertise and quality of products and service, participants will work to improve their own rankings.
  4. Simple, salient and timely disclosure is more effective than legalistic, voluminous and poorly timed discovery.
  5. The highest standards of conduct and duty should never be compromised. The obligation of an advisor is as a fiduciary: the same as for doctors and lawyers.

If you comment on 33-404, consider these points.

Read: CSA project will reveal impact of CRM2, POS amendments

Do you agree? Disagree? Have your say in the comments (moderated) or email us. If you plan to comment to CSA, here’s how to do it. The deadline is Sept. 30.


Mark Yamada is President of PÜR Investing Inc., a software development firm. Disclosure: PÜR Investing Inc. provides risk-based model portfolios to Horizons ETFs.
Originally published on Advisor.ca
See all comments Recent Comments


There is no such thing as a Fiduciary in this industry or any other industry. Stop the nonsense. There is a conflict in every business and you can’t regulate it. People say , do what is in best interest of the client. As soon as you charge the client 3 cents the client could say paying anything is not in my best interest. Regulators should just leave things alone.

Friday, Sep 23, 2016 at 2:38 pm Reply


There is no doubt in my mind that larger clients have subsidized smaller clients. Smaller clients often take as much time as a small client but create little revenue. Many advisors take on a small client due to their relationship with a larger client or due to a personal desire to help that client.

If our business comes down to a numbers game of only taking on clients who produce a certain level of revenue there is no doubt that smaller clients will suffer and those clients are often the ones who need our help the most.

A small client will probably be limited to dealing with a bank who can use their economies of scale to service mass numbers of clients but will they receive advice or product.

I recently reviewed a small investors TFSA. Her TFSA had 5 different GIC’s yielding less than one percent. I suspect that no effort was made to educate her to other possible investments that could have helped her better. That bank has one of the better balanced funds available but those can’t be sold by a teller.

Would that person use a roboadvisor? Not likely since she doesn’t even have a computer. Would she be referred to the financial planner at the bank? Not likely as she is not large enough and also is not likely to present what I would call a flight risk as she has dealt at the bank for many decades.

Monday, Sep 19, 2016 at 11:32 am Reply

Dave McGruer

I will show how a ban on commissions or embedded compensation is a profoundly immoral position to take and explain a proper moral framework for such decisions.

The purpose of morality is to provide a set of principles for how you should act in furtherance of your life. Since the essential and distinguishing characteristic of human beings is their ability to reason and think conceptually, the greatest of human virtues is the application of reason to the challenges of surviving, thriving and pursuing of happiness. This is the moral foundation for the right to liberty, meaning the freedom to take what actions you deem necessary to further your life. A corollary is that you must recognize that others have the same right and so you must refrain from violating their rights. Implicit in the right to liberty is that the reasoning individual, the unit of human life, is the proper beneficiary of his own actions. To sustain his life a man must produce values and he will find it is valuable to specialize and trade values with others. What he produces and trades for becomes his property and the right to property is inextricably linked to man’s right to life and liberty. A man does not exist to serve or obey others but to pursue his own happiness in a non-sacrificial manner.

Now consider how morality applies to an individual who decides to seek investment advice. Morally, he has the right of liberty to seek out and engage with any advisor on any terms he chooses. He may prefer an advisor who charges a flat fee, an hourly fee, an asset based fee, an embedded fee or an account level fee, or any other mechanism imaginable. There is no one (and I mean no one) who can claim a moral right to forbid this individual from making a reasoned choice on any matter related to his seeking of financial advice and this certainly applies to the method by which he chooses to pay his selected advisor. To ban any method of compensation is to violate the right of the individual to live his life as he sees fit, to make his own free choices and to pursue the values that he believes will lead to his happiness. The call for banning a form of compensation is thus a fundamentally immoral position from the perspective of individual investors.

What about the financial advisors who the individual may consider in his search? Morally, they have the right to consider all possible structures and options for their business, including who they will deal with as clients and all the terms of the trading of value including methods of compensation. An advisor may adopt one method over another for a variety of personal reasons or may use different methods as a practice matures or even different methods at the same time for different clients, according to what the advisor and the client agree on. There is no individual, no regulator and no government that can morally assert a right to interfere with, force, block, ban or forbid the advisor and investor from a mutually agreeable terms of engagement.

Now consider a mutual fund company’s moral position. One company may choose to offer embedded compensation options because it is demanded in the market by investors and their advisors. Another company may opt to provide only products with no embedded compensation because they want to attract a certain type of customer. Some will do both. In all cases, so long as there is no regulatory interference, there will be tremendous competitive forces that incent the fund company to adapt to changing market demand or risk going out of business – and that demand necessary comes from the individual investor, the client. If a client and advisor wish to use one method or another of compensation and a fund company offers it, there is no one and no group or organization that can claim a moral right to interfere in this freely chosen transaction, which represents an honest exchange of values.

Honesty is a key term here. It is important that there be no fraud or deceit at any level of the business transactions I have described because this would imply a violation of rights – a faking of reality that is unjust and which requires government action, through the justice system, to correct. Honesty with regard to embedded compensation means that the mechanism and quantum of compensation is known to the client and thus the client has a clear opportunity to decide if it is acceptable – and reject it if not. In the case of mutual fund service fees, they are disclosed in a Fund Facts document, a Prospectus, an Annual Report, a signed Mutual Fund Disclosure form and usually form an important part of the early conversations between prospective client and advisor. A client may rationally ask “how may I pay you” and/or an advisor will rationally explain how he is compensated so the client can see if there is an alignment of interests between the two of them. A critical distinction is that many of those who argue for a banning of service fees mistakenly equate “embedded” with “hidden” and thus commit a grave intellectual error. If something is disclosed several times, is information very easy to find for any investor taking any care at all in decision making, is talked about all the time in the financial media, is included in all basic books on investing and is all over the internet, it is a gross injustice to call it hidden and imply an intent of malice where none exists.

The truth is that embedded compensation is both profoundly moral and practical. It is moral because it represents an honest compensation mechanism offered on the market for the judgement of clients, who may accept or reject it as they decide is most suitable and preferable for them. It is practical because it offers a radical simplification and economy when compared to the alternative of an account fee method.

Consider the advisory practice of one fairly successful advisor who we will assume serves two hundred households for which there are likely over eight hundred accounts. In an account based fee model the client is charged a monthly advisory fee plus, of course, HST as a separate line item. Thus, each account will have a minimum of 24 administrative transactions per year that are not done for purposes of asset allocation or in pursuit of better or more consistent returns and do not form part of any advisory recommendations at all but must be done just to complete the compensation portion of their arrangement. In an average family there will thus be about one hundred such transactions per year and in the advisory practice there will be twenty thousand such transactions per year. In order to manage the regular payment of advisory fees, each account must either have regular sell transactions which raises the number of transactions by as much as 50% or else the account must have regular income coming from the investments which means a different set of regular transactions, but the most common method is to maintain a small cash balance of a few percent in the account, which of course reduces the rate of return on the account since the cash earns little or no return.

With the embedded service fee model there are zero administrative account transactions per year, no requirements for regular sell transactions, no need for current investment income and certainly zero need to keep wasteful cash on hand. The advisor’s time is thus freed up to provide valuable advice instead of no- or low-value fee administration and this arrangement can clearly serve the interest of the client and the advisor – but only if this is what the client prefers. The client’s statement is not crowded full of small administrative transactions that make it more difficult to understand the statement – the statement shows only the result of the advisor’s recommendations net of compensation. With embedded compensation the twenty thousand transactions that consume valuable advisory time and cloud client statements are replaced by as few as twelve transactions that take place electronically between the fund company and the dealer.

Consider the known and highly likely effects of a regulatory ban of embedded compensation in mutual funds. First, the market supply and the diversity of advice will be reduced and this reduces competition. The cost of advice for many consumers will rise since as I have shown above it is very economical to use embedded compensation. Further, advisors will look at many smaller clients and decide the account fees are not enough to make it economical for them, and they will fire clients. Some dealers will require this, as is already the case. Many clients will look at the hundred fee transactions per year and think they are being charged more than before or are simply peeved by the sheer number of fee transactions and annoyances involved in administration. Some clients will think that if embedded compensation is banned, it must be immoral and thus their advisor was acting improperly for years in the past and this will poison some client-advisor relationships. Many consumers will be forced to seek out lower cost advice or find a do-it-yourself service and many will of course receive lower quality advice as a result. Thus, the amount of consumer dissatisfaction will rise and of course the wealth of the nation will be lower as a result of the lower amount of financial advice being provided. Financial advisors will be blamed by consumer advocacy groups for not sacrificing themselves to serve former clients who are less economical and more administratively annoying than before. Regulators will set out to solve the problems they have created, ignoring their role in the harm that has been done. Governments will be called upon to provide more income support programs due to the lower wealth of the nation and taxes on the most productive citizens will rise to pay for these programs. Clients lose, advisors lose, fund companies lose, society loses.

This destructive cycle of rights violation and interference in the free market can have no good ending, no life-improving benefits for citizens, no increase in the wealth of citizens and no happy outcomes. When actions are immoral the results can only be injustices and harm. A professional financial advisor should know the basic principles of a free society, understand the basis for a proper, free and competitive investment marketplace and defend the rights of all citizens, whether they be individual investors, financial advisors or producers of mutual fund products.

Monday, Aug 29, 2016 at 4:47 pm Reply


Dave, very well said. 100% correct.
Unfortanetly , regulators have never sat with clients 8 hours a day dealing with real live people. They have no idea how things work.

Friday, Sep 23, 2016 at 2:32 pm


Please illuminate us on how any sort of best interest or fiduciary rules wil be worded and enforced. Will I be forced to recommend only funds that were the top performer last year? Will I be required to spread out my clients investments across the broad spectrum of fund companies rather than a short list of providers? What if I use just one or two providers? Will. Be assumed to be gouging my clients? What about just one fund company AND that company owns the dealer I process my business through AND I am enrolled in a share purchase program for that company? Will I be forced to divest even if that one company has an above average track record of performance?

Saturday, Aug 27, 2016 at 2:32 pm Reply

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