Embedded Commissions On The Way Out?

The ongoing availability of embedded trailing commissions might just be about to end in Canada. A report on the subject from the Canadian Securities Administrators (CSA) was released on January 10, 2017. We’re now left with operational questions about how to implement the recommendations. Some stakeholders remain in denial about this development and are using questionable reasoning and public relations in an attempt to divert attention to maintain the status quo as long as possible. While not certain, the writing seems to be on the wall that embedded commissions are on the way out.

The possible decision to discontinue will not be about “client choice” or any so-called “advice gap”, rather it will focus squarely on eliminating conflicted advice. More choice isn’t necessarily better choice. Furthermore, to hear a number of commentators tell it, there will be a small army of small investors who will turn away from financial advice because they cannot “afford” it. Assuming they’ll continue to pay the same amount, that’s simply not true. How you pay has no impact on how much you pay; four quarters does not cost more than a dollar. People who choose to forego advice in the future will do so because they do not perceive it to be worth the cost; not because they can’t “afford” it. How exactly does changing the way you pay for advice have any impact on your ability to pay for it?

The dual smoking guns of the Brondesbury Report   (http://www.osc.gov.on.ca/documents/en/Securities-Category8/rp_20150611_81-407_mutual-fund-fee-research.pdf) and Cumming Report (http://www.osc.gov.on.ca/documents/en/Securities-Category8/rp_20151022_81-407_dissection-mutual-fund-fees.pdf)—both released in 2015—have likely put the final nails in the embedded commission coffin. The evidence is simple: embedded compensation unambiguously leads to conflicted advice—and there is no place for that in the world today. The only things left to decide are:

•          When to discontinue?

•          How to discontinue?

•          On what terms do we discontinue?

Much as many people have lamented the slow pace of reform in Canada to date, the sense I get is the public-opinion-based lobbying going on now is being wasted. Overly facile arguments based on anecdotal evidence no longer cut it with regulators, who finally seem determined to go to great lengths to make concrete, demonstrable, evidence-based recommendations and policies.

While I applaud an evidence-based approach, the question that this begs is: “If regulators were so determined to make policies based on verifiable evidence, then why did they squander an entire generation listening to unsubstantiated stories in the first place?” Stated differently, if regulators weren’t going to do something tangible until they had hard evidence that embedded compensation causes bias, then why did they wait until 2015 to look for that evidence? They would have found it in 1995 when Ontario Securities Commission (OSC) commissioner Glorianne Stromberg wrote a report recommending discontinuation. They only reason they didn’t have evidence is that they didn’t request it.

Note that a final decision is likely a long way off. The paper will be available for comment for 150 days, so that brings us to about the end of Q2. Then, the various submissions will be read and synthesized into some form of a final recommendation document. Realistically, we’re talking about those recommendations being made in the second half of 2017 with implementation coming after that.

Canada has been a regulatory laggard thus far, but the phrase “better late than never” clearly applies in this case. Nonetheless, this is unambiguously good news for consumers.

John J. De Goey, CFP, CIM, FELLOW OF FPSC is a Portfolio Manager with Industrial Alliance Securities (iAS) and the author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by iAS.