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The quality of advice the average investor is getting from financial advisers calls into question the fee structure for that profession, says a new report from the Ontario Securities Commission’s Investor Advisory Panel.

The report, published Monday by the IAP – a nine-member body with an arm’s-length relationship with the OSC – says a “large proportion” of investors with small or medium-sized portfolios are not getting timely and relevant investment advice. For instance, of the 3,083 Canadians surveyed, 49 per cent of those with portfolios worth $50,000 to $100,000 said their adviser spent less than an hour communicating with them during the past year.

This despite the prevalence of so-called trailing commissions – embedded fees that make up a portion of a fund’s management expense ratio (MER), the report notes.

Investor-rights advocates have long decried the use of embedded commissions, which are paid out to advisers as long as an investor holds a fund. The main concern is whether such a compensation model creates a conflict of interest, with advisers driven more by the commissions than the best interests of their clients.

Last June, Canada’s securities regulators announced they would curtail trailing commissions collected by discount brokerages, but they stopped short of banning such fees entirely. The changes have yet to come into effect.

The investment industry opposes a ban on trailing commissions, arguing that it would result in many investors losing access to professional advice.

The IAP report, which was based on an online survey conducted in March, 2019, found that 43 per cent of respondents did not agree that their adviser had properly discussed financial concepts with them. Only 20 per cent said they had received advice about budgeting or debt management.

“In our view, therefore, it is not at all clear that preserving the availability of trailing commissions will ensure investors with small and medium-sized portfolios get access to advice that meets their needs,” the report reads.

“By contrast, we believe the survey results offer clarifying evidence, as outlined above, about significant shortfalls in the scope, timeliness and effectiveness of the advice many of these investors receive. We hope policymakers will use this evidence to assess the degree of risk actually posed by a ban on trailing commissions, and to assess whether that risk is outweighed by the benefits to be gained from eliminating known harms caused through the use of trailing commissions.”

The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) has opposed the use of embedded commissions, and its founder and interim executive director said he wasn’t surprised by the results of the IAP survey.

“We’ve been concerned for a long time that most investors who go into financial institutions for financial advice don’t receive particularly individualized investment advice,” Ermanno Pascutto said in an interview. “Most of the time they’re just sold a preset package of the firm’s proprietary products. Invariably these are high-fee mutual funds.”

Paul Bourque, president and CEO of the Investment Funds Institute of Canada, said that some of the survey’s results were positive. For instance, 87 per cent of respondents said they are comfortable speaking with their investment adviser, and 84 per cent said they are satisfied that their adviser responds to their questions promptly.

“We are encouraged by these results and glad to see that regardless of wealth levels, investors are receiving important aspects of financial advice,” Mr. Bourque said in an e-mail. “However, more could be done to understand investors and what they feel is important to them."

In the past, Mr. Bourque has said that banning trailing commissions would eliminate the most common way small retail investors pay their advisers, adding that there are already mechanisms in place to address conflicts of interest.

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