“The opera ain’t over ’til the fat lady sings.”
That was the response of John Mountain, director of investment funds and structured products at the OSC, when asked at a Registrant Regulation session if an embedded commissions ban is nigh.
“We’re a long way from even the first intermission of this particular opera,” he adds. “I would not, at this point, bet on any particular outcome.”
He notes that Canada’s discussion on embedded commissions reflects the wider global discussion on consumer protection initiated after the financial crisis. Adding fuel to the fire is research that Canada has the highest mutual fund fees in the world (although a 2015 study commissioned for IFIC finds that Canadian mutual fund investors pay similar amounts to advised U.S. investors).
The future is now
Though session moderator Rebecca Cowdery, partner at Borden Ladner Gervais, comments that recent regulatory proposals seem intent on disrupting current compensation models, Mountain says many in the industry have already moved on.
For instance, he estimates that close to half of IIROC registrants are fee-based, and many new MFDA registrants forgo products with embedded commissions. “They are confident they can have a successful business with an average $50,000 book on a fee-for-service basis,” he says, adding that new entrants aren’t amortizing legacy systems and are probably leveraging technology.
But an embedded commissions ban isn’t meant to result in only fee-based accounts, which don’t serve buy-and-hold investors, for example. Fee-for-service options might include commissions or charging per hour for financial planning, says Mountain.
Investor protection concerns
Referring to the proposal’s first investor protection concern, Cowdery asks how embedded commissions raise conflicts for fund managers.
“Fund managers see the people who are interacting with the investors as their clients,” says Mountain. “And they skew their operations to the benefit of the dealers and advisors [who] support them.” New products are often developed with a focus on making sales easy and liability low, he says.
But whether banning commissions solves that problem isn’t clear, says Cowdery.
The proposal’s second investor protection concern — that embedded commissions reduce investor awareness, understanding and control of dealer compensation costs — remains a problem even with the implementation of POS and CRM2. Mountain says preliminary results from CSA’s longitudinal study on the initiatives’ effects show a significant percentage of investors think they pay nothing for their investments.
In contrast, “an informed clientele is a demanding clientele,” he says, “[which …] keeps the industry on its feet.” He further adds that the industry is important to the financial well-being of middle- and working-class Canadians who use mutual funds to save.
“The mutual fund is a very good investment vehicle, giving people access to professional advice,” echoes Cowdery. “[That] doesn’t necessarily come through in the [proposal].”
The last concern, that trailing commissions paid by fund managers to dealers don’t give investors input into the services they receive, is “a big problem,” says Mountain. As an investor, he appreciates transparency. A positive outcome of the embedded commissions ban in the U.K. is that asset managers now negotiate fees with clients, he says.
The value of advice
Concerns of an advice gap are real — but not as a result of the proposal. In the U.K., new proficiency requirements for advisors meant that many retired instead of pursuing new qualifications, says Mountain. Canada has similar demographics, with the average age of advisors being 56.
Mountain notes investors already receive different levels of advice and service, depending on investable assets. Advice must be provided in an “effective way that does not require what, today, is the equivalent of a bespoke suit for each and every investor,” he says, and refers to the success of online platforms.
He says the industry has difficulty defining advice and its value, which isn’t exemplified by choosing stocks; rather, it’s in having a plan, saving money and paying down debt.
“It’s the basic education the advisor is delivering,” says Mountain.