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Not so fast on embedded-commission ban, study says

Report adds more fuel to controversy over embedded commissions, citing possible loss of choice, market concentration

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As regulators continue to examine whether sales fees should be unbundled from investment products, a new report suggests the move could have serious ramifications for Canadians' access to financial advice and raise issues of investment choice, industry concentration and price transparency for clients seeking financial advice.

The report, released Thursday by the School of Public Policy at the University of Calgary and authored by Henri-Paul Rousseau, examines the option of banning embedded sales commissions for Canadian financial advisers and the broader, public-interest issues arising from such a ban.

The debate on embedded commissions has been long-standing among Canada's investment industry. 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 for the past 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.)

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According to Mr. Rousseau, the ban on these commissions would create a number of public policy issues. Firstly, it would likely create an advice gap in Canada, due to households being averse to paying up front for an advice fee. Secondly, it will likely cause a loss of choice for Canadians who have varying needs and preferences. The report says that smaller and independent product manufacturers and distributors would be squeezed out, creating a market concentration in the hands of the bigger financial-advice players, as well as a loss in pricing transparency for clients.

"If the goal is to make financial advice widely accessible, then it is critical that policy-makers seriously consider all the implications of a ban on embedded commissions," Mr. Rousseau says in the report. "A ban on embedded sales commissions would mean less choice in the market for a service that needs to be competitive and innovative to serve the broad spectrum of clients' circumstances, risk appetites and needs."

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.

Mr. Rousseau and the School of Public Policy strongly supports the current policy efforts by the provincial governments to require higher proficiency standards for financial advisers that will help improve both the quality and the consistency of financial advice throughout Canada.

"While it may not be part of the CSA's responsibilities to implement policies aiming at increasing access to financial advice, it certainly is the job of policy-makers to do so," Mr. Rousseau says. "We need policies that both increase financial literacy, and ensure and improve wide access to financial advice. Policy makers should not lose sight of the need to ensure better access for all Canadians to a competitive and innovative market for the distribution of financial products. This is a necessary condition for the long-term level of savings and for the retirement readiness of Canadian households."

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