Our current regulatory environment continues to generate reader commentary. Here, we publish a letter to the editor arguing that the cost of advice will not rise if embedded fees are banned.

Re: CARP fee poll hits a nerve with advisors, May 4

Where is the evidence that unbundling will put advice out of reach? Where is the evidence that the cost (of advice or otherwise) will rise? Why haven’t all advisors been frustrated by what IFIC is only now (in 2017!) noting as a problem ([advice trailers] paid to DIY service providers)?

[I acknowledge that under an embedded commission ban,] the cost of advice is unlikely to change materially. Similarly, product costs (especially re: mutual funds) will likely drop, but only modestly.

The big change regarding client cost is the substitution effect. [As we saw in the U.K.,] advisors will likely move from recommending high-cost products (often used previously due to embedded compensation) to recommending low-cost products (once embedded compensation is no longer available). The absolute savings will be passed on to investors. In short, the U.K. experience is a smoking gun [showing] that advisors are motivated more by compensation than by product merit when making recommendations to clients. When the compensation filter is removed, they actually do the right thing.

Here’s an example. Let’s say clients are currently paying 2.35% via a mutual fund MER (including a 1% trailing commission that goes the advisor). In an unbundled world, the cost advice might actually go up (say to 1.1%, on average). However, instead of using F-class funds that cost 1.35%, the advisor might recommend an ETF that costs 0.25%. That’s a 0.1% increase in the cost of advice – and a 1.1% decrease in the cost of investment products. The absolute total cost to clients (since clients pay for both the investment product “parts” and the financial advice “labour”) is about 1% cheaper. A client with a modest $100,000 portfolio would actually pay $1,000 less every year as a result.

It is simply disingenuous to talk exclusively about the cost of advice – as if the cost of investment products was not even a consideration.


John J. De Goey, CIM, CFP, Fellow of FPSC
Portfolio manager, Industrial Alliance Securities Inc., Toronto

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