No advice gap from other commissions bans: investors

By Staff | June 16, 2017 | Last updated on June 16, 2017
3 min read

The experience of banning embedded commissions in Australia and the U.K. did not create an advice gap, investor advocates say.

Rather, they say there’s already an advice gap that the Canadian Securities Administrators should close: the one between independent and partial advice.

“Far from creating an advice gap, the banning of embedded commissions in the U.K. and Australia has led to positive strides forward,” the OSC’s Investor Advisory Panel (IAP), a committee representing investor interests, says in a comment letter for the CSA’s consultation its proposal to ban embedded commissions.

The IAP says that after the U.K. banned embedded commissions, the country’s Financial Conduct Authority conducted a post-implementation review that found “the ban had reduced product bias from advisor recommendations and led to better investor outcomes.”

The panel says CSA is in a position to fix “the only advice gap that needs to be urgently closed”—the one “between independent and compromised advice.”

Financial advisors have told CSA they are concerned that losing embedded commission income would cause advisors to drop out of the industry. They argue cheaper, robo services and factor investing alternatives will not fill this gap—pointing to research showing that advisors offer clients investing discipline and financial plans that help them save more.

Read: CSA’s embedded commissions ban falls short for clients, say advisors

IFIC, representing investment funds, has also been pushing back against a proposed ban, arguing it won’t eliminate other compensation conflicts and that it is a disproportionate response to the issues identified by CSA.

But, investors have also piled into the CSA consultation, arguing that embedded commissions are not transparent and that all compensation conflicts should be eliminated because they create advisor bias.

“The majority of seniors cannot comprehend complex mutual fund classes with embedded commissions that currently exist,” Mary Boom, a retiree in London, Ont., said in a comment letter. “I want to know the cost of the fund I am buying separate from the cost of the advice. This would allow for a more transparent process and the interests of the client being addressed first and foremost without any incentivized conflict.”

IAP used its letter to comment on a swath of advice industry regulation, calling for a ban on embedded commissions on mutual funds, non-redeemable investment funds and structured notes—and any other forms of compensation “that harm investors.”

Embedded commissions “are just the tip of the iceberg,” IAP adds, referring to industry incentives encouraging proprietary products and referral arrangements.

Read: Industry response to embedded commissions ban: IFIC and Advocis

CRM2 not enough

Retiree association CARP says CRM2 did not go far enough: “Financial firms must only disclose the cost of advice; there is no requirement to disclose the cost of products sold.”

CARP referred to a survey of its members showing that 44% “did not realize that they were paying embedded commissions to their advisors. Moreover, less than half knew when their advisor received a commission from selling a financial product or how much the commission was.”

Discount, online brokerages that charge embedded fees without advice “is tantamount to theft,” the group adds.

Investor advocate group FAIR Canada says embedded commissions should be banned along with deferred sales charges paid by investment fund managers—which it says cause conflicts of interest.

The group says the mutual fund fee structure “results in millions of Canadians not receiving objective advice and being sold suboptimal products.”

FAIR cites a 2011 Morningstar report indicating that Canada is among “the highest mutual fund fee jurisdictions in the world,” while many actively managed funds have underperformed.

Read the letters from the Investor Advisory Panel, Mary Boom, CARP and FAIR.

Also read:

Your services are too expensive: survey

Commissions ban could push advisors to sell insurance products: MFDA staff


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