Two of Canada’s ETF giants welcome CSA’s proposed ban on embedded commissions.
In a comment letter dated June 9, Vanguard Investments Canada’s Atul Tiwari came out in strong support of the ban, writing, “We are supportive of this initiative, as we believe the market operates in the best interests of investors where product providers compete on the price and quality of their products in order to secure distribution […].”
He lists the following three benefits of leveling the product playing field:
- Removal of product bias, or perceived bias, on the part of dealers and advisors, “to ensure investment decisions are based on the suitability of the product rather than the compensation paid to the dealer and advisor.”
- Increased cost transparency, product access and cost competition.
- Advisors will highlight their value propositions to help investors the costs for services.
Tiwari, who highlights what has happened in the U.K. following the removal of commissions, dismisses warnings of people losing access to advice. He says, “We disagree with the notion of an ‘advice gap,’ as we feel that new lower-cost competitors, online digital platforms and robo-advisors would enter the market and service this group of mass-market investors.”
That said, he cautions, “Any ban on embedded commissions [should] be accompanied by a corresponding effort to educate investors on the changes and promote lower-cost and technology-enabled advice.”
Despite that challenge, Tiwari doubts the industry would move away from embedded commissions organically. While the industry is shifting toward fee-based platforms, “this shift is limited,” he says, citing his firm’s research. On top of the commissions ban, Tiwari says Vanguard is in favour of CRM2 and POS initiatives, which he finds also help equalize the industry from a product and client-service perspective.
Horizons ETFs is also on board with the ban on commissions. In its letter, the company says discontinuing embedded commissions would be “a great initial step” toward protecting investors and markets.
If a ban is enacted, Horizons says it should apply to all to products, without exception, “to ensure no arbitrage of the system.” In response to CSA’s question about the proposal possibly leading to an advice gap, Horizons adds, “We do not think this will occur.”
Like Vanguard, Horizons notes a natural transition away from embedded commissions “would be very slow.”
BlackRock welcomes CSA’s proposals, but with caveats. It says “discontinuing embedded commissions would go a long way towards addressing the three key investor protection and market efficiency issues,” but also mentions the threat of an advice gap. Further, it argues more work is needed to co-operate with the industry and investors.
And while Credential Financial says it’s “in support of discontinuing embedded commissions,” it goes on to say there could be “unintended outcomes.”
The other side…
Other fund companies’ concerns echo those of advisors and industry organizations. In particular, several find CSA is pushing too hard for the adoption of passively managed products.
- Proposal to ban embedded commissions threatens industry: letter
- Banks to CSA: robos not ‘attractive alternative’ in event of commissions ban
“The Consultation Paper […] evidences a bias in favour of passively managed funds,” writes Franklin Templeton Investments, adding, “We do not believe it is the role of regulators to advocate for, or shift the regulatory landscape in favour of, a particular style of investing.”
Sun Life Global Investments also argues that “clients with smaller accounts should be able to choose either passively or actively managed funds,” rather than be forced to use robo-advice and passive investments.
Alternatives to a ban, says SLGI, include: requiring service agreements between advisors and clients; implementing standardized naming conventions for different types of funds based on compensation structure; and so-called CRM3 cost disclosure.
Read: IFIC sets CRM3 in motion
IA Financial, which says “a banning of embedded commissions could lead to the rise of a different set of conflicted compensation arrangements,” also offers alternative approaches.
The company writes, “[…] The current system in Canada, while perhaps not perfect, is working well for the majority of investors, from mass-market retail investors to high-net-worth investors.” So, rather than the proposed ban, CSA could introduce “a cap on commissions for [fund] series offered without advice,” for example, or it could standardize or cap embedded commission by asset class, IA Financial suggests.