Skip to main content

Some want greater transparency and clarity on how investors pay for advice, while others feel the ban will create a major gap in advice.cacaroot/Getty Images/iStockphoto

The use of embedded commissions continues to spark debate among Canada's investment community as regulators consider an outright ban on hidden fees.

One of the most controversial costs is the mutual fund trailer fee, also known as trailing commissions. This fee is a portion of a fund's management expense ratio (MER) and has been the topic of much controversy over the last two decades. These commissions are paid out to investment advisers for the length of time an investor holds a fund and depending on the type of investment fund, can range from 0.5 per cent up to 1.5 per cent. (Both the investment firm and its adviser who sold the fund share in these commissions.)

But many investors are not aware these fees are paid out to an adviser when purchasing a mutual fund, which could create a conflict of interest when it comes to advisers recommending which funds their client should buy.

The controversy has caused many in the industry to ask for an outright ban on the use of trailers by asset managers. The result could force investors to pay upfront for the advice they receive from an adviser – similar to how a lawyer or medical specialist might run their business, investors could receive an invoice with a dollar amount owing for a service provided.

Britain and Australia have already banned the use of trailer fees, but several reports have suggested these countries may have an "advice gap" for those investors who cannot afford to pay out of pocket for a financial adviser.

Earlier this year, the Canadian Securities Administrators released a paper seeking industry comment on the topic of discontinuing embedded commissions. The paper, Consultation on the Option of Discontinuing Embedded Commissions, also asked the investment community on what the potential effects of a ban would have on Canadian investors.

More than 140 submissions were received by the CSA as of June 9, and include responses from a variety of industry groups and professionals including advocacy groups, financial advisers, investment firms, robo-advisers and asset managers. The CSA is currently reviewing the submissions and will conduct a roundtable discussion on Sept. 18 to examine the potential impacts of discontinuing embedded commissions in Canada.

Currently there is no clear consensus on the issue as investor advocates demand greater transparency and clarity on how investors pay for advice, while other industry groups and advisers feel the ban will create a major gap in advice – especially for those Canadians who fall in the middle to lower income bracket.

Here's a snapshot of the debate from both sides.

In support of the ban on embedded commissions

"Canada has an opportunity to join a global trend aimed at improving investor protection and transparency. We have seen this take root in the U.K., Australia and the Netherlands, leading to greater investor outcomes including lower investment fees, greater product access and enhanced fee transparency...... a system that eliminates conflicts of interest or the perception of a conflict when it comes to recommending investments is in the best interests of the industry, advisers and investors. Already we have seen a rising number of advisers moving to fee-based business practices proactively, and they see this as building more trust with clients and providing an opportunity to communicate their value."

- Atul Tiwari, managing director of Vanguard Investments Canada


"Embedded commissions create an inherent conflict of interest. If a financial adviser earns a sales commission that is hidden from clients, it raises the question – who are they serving: the client, or the products that pay the highest commission? Clients have the right to expect un-conflicted advice that puts their interests first. If the investment industry can't live up to that promise, how can clients trust them with their life savings?"

- Michael Katchen, CEO of robo-adviser Wealthsimple


"I doubt there is anyone in the industry that can justifiably deny the conflict of interest inherent in the structure of embedded commissions. While many [advisers] conduct themselves professionally and like fiduciaries, I have seen first-hand how the conflicts of embedded commissions play out in adviser-client interactions and recommendations."

- Dan Hallett, vice-president with HighView Financial Group


Embedded commissions should be scrapped in order to better align the interests of the investment industry and investors, enhance competition and foster investment industry innovation....While clients' best interests are served by holding lower-cost funds, asset managers have an incentive to promote higher-cost alternatives from which they generate more revenue from fees. Asset managers use embedded commissions to give advisers incentive to favour higher-cost funds, creating a conflict of interest."

- Morningstar Research Inc.


"[We] believe that investors must be able to understand the true costs of their investments, the costs of buying and holding their investments, and the cost of the advice they receive. The current embedded fee model is not well understood by investors and embedded fees raise conflicts that could incent advisers to recommend funds that benefit the adviser ahead of the investor."

- The Ontario Securities Commission

Against the ban on embedded commissions

"Banning embedded commissions will have long term negative impacts on the ability of Canadians to plan and save, leaving them with substantially lower levels of assets to fund their retirement. A recent study by PWC estimates that the ban would result in individual Canadian investors accumulating, on average, $240,000 less in retirement savings than those with access to advice. This would create pressure on our social safety net, particularly as the population continues to age."

- Paul Bourque, president and CEO of the Investment Funds Institute of Canada


"Embedded commissions, particularly trailing commissions, are more efficient because they can be calculated and managed on a large scale by the fund companies. It is more time-consuming and therefore more costly – for a dealer to perform the fee calculation and deductions at an individual account level ... fee-based accounts are typically only offered to larger accounts. Also, due to the overhead involved, preventing embedded commissions and requiring dealers to offer fee-based accounts will increase the cost and risk of starting a new dealer, which will limit competition and further limit access to advice for smaller investors....

"We propose that the CSA leave embedded commissions in the advice channel for accounts up to $500,000 in value, and eliminate embedded commissions from the no advice channel. We have no issues with eliminating embedded commissions on accounts over $500,000. At that account size a negotiated fee account is now a viable option for dealers, advisers and clients alike."

- Mark Kent, CEO of portfolio strategies in Calgary


"We believe that eliminating embedded commissions may disproportionately impact less affluent Canadian investors and, in particular, those investors that deal with smaller independent dealers. Such investors may be unwilling to pay for, or appreciate the value of, advice in a direct pay model. Nor is it clear that such investors would be inclined to obtain advice from robo-advisers as is suggested by the CSA."

- Steve Geist, senior executive vice-president and group head of wealth management for CIBC


"Advisers are currently willing to serve these small investors because of the cross-subsidization that embedded compensation allows, as well as the promise of growing future income streams that is only realized if the investor is successful as well. The fact is that most low– and middle-income consumers are not willing to pay for advice directly. Without the benefit of the cross-subsidy, investors will be facing charges that effectively equate to hundreds of dollars per hour.... So the elimination of commissions will orphan millions of small consumers."

- Greg Pollock, CEO of the Financial Advisors Association of Canada

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe