Commissions ban could push advisors to sell insurance products: MFDA

By Staff | May 25, 2017 | Last updated on May 25, 2017
3 min read

The MFDA has released a research report on its members, advisors and clients. The report aims to offer more information on MFDA members’ business operations as well as inform stakeholders of the potential impact of an embedded commissions ban.

The MFDA recognizes there are factors at play that it hasn’t measured, but says, “Although it is difficult to specifically predict the outcome of a ban, the information contained in this report illustrates those business models, advisors and clients that have the greatest potential to be impacted.”

Its conclusion is that financial advisory (FA) firms would be hardest hit (compared to deposit-takers and direct sellers) — potentially leaving some investors without advice.

Read: Client costs will fall under commissions ban: letter to editor

That said, the MFDA notes an embedded commissions ban wouldn’t apply to insurance products. The MFDA says this means some “clients may not, in fact, experience any change in their advisory relationship. Rather, advisors may decide to recommend products or services to their clients that are not subject to the same regulatory requirements.”

Still, that would mean the type and number of products available to clients would change, even if the reporting they see remains the same.

Read: OSC’s priorities provide clues to enforcement

Here are selected report details:

  • MFDA says its advisors provide the “most accessible advisory service to retail investors in the securities industry.”

The MFDA says its advisors provide services to almost 9 million Canadian households. Of those, 83% have less than $100,000 in financial assets (mass-market households).

Though only 6% of financial wealth in Canada is owned by mass-market households, the MFDA says, “They are a significant segment of MFDA members’ client base, both in terms of assets and number of households.” If an embedded commissions ban results in an advice gap, many Canadians could potentially lose access to advice.

  • Financial advisory firms struggle compared to deposit-takers

Of 91 MFDA member firms, 69 are FA firms (see page 7), and all but one of those offer third-party funds. For deposit-takers (13 firms), about 95% of their mutual fund assets under management comprise proprietary funds.

“Unlike the [deposit-taking] firms, the FA firms do not have the same flexibility to restructure or manage revenue and costs between fund manufacturing and distribution,” says the report.

Deposit-takers have the vast majority of household relationships (72%) and assets (59%) in the MFDA membership. In comparison, FA firms have 27% of households and 39% of membership assets.

  • Deferred-sales-charge (DSC) and low-load funds make up the largest component of FA firms’ mutual fund assets (about 48%)

The report notes DSC fund assets appear to be declining, as some fund companies discontinue these funds and as member firms establish supervisory controls and procedures to oversee, and in some cases limit or restrict, trading in DSC funds.

Read: DSC alternative has limited merits

Front-end load funds make up 37% of total FA firms’ mutual fund assets–but most are sold without an upfront charge, says the report.

Read: No trailers for advice unless you provide advice, says IFIC

  • About 56% of advisors licensed with FA firms (or 19,021 advisors) have a book size of less than $2 million

“Almost all advisors licensed with FA firms are dually licensed to sell insurance,” says the report, “and therefore they are not necessarily relying solely on revenue from mutual fund activity to generate income.”

However, those with a book less than $2 million are likely unable to support themselves from their advising activity. These advisors are also more reliant on DSC commissions, with 53% of their book in DSC funds.

So, the report finds, “a mandatory switch to fee-based or direct-pay arrangements will therefore have a greater impact on those smaller advisors who are more reliant on DSC commissions than those advisors who are currently predominantly earning trailing commissions.”

Mass-market households have the greatest concentration in DSC funds, the report adds. “Advisors may be using the embedded DSC commission, paid by the fund company upon purchase, to finance the cost of offering advisory services to mass market clients,” says the report.

Interestingly, the report notes mass-market households served by advisors with larger books have materially lower levels of DSC than those served by advisors with smaller books. “It appears that as advisors grow their business, they reduce their reliance on DSC across the households that they service,” says the report.

Read the full report.

Also read:

How to get ahead of the regulatory curve with clients

Ban on embedded commissions ideal but not imminent: OSC director staff


The staff of have been covering news for financial advisors since 1998.