Ban On Embedded Commissions Coming, Despite Industry Objection

In 1996, following one of the worst mass killings in history, the Australian government made sweeping reform to its gun control laws, banning semi-automatic rifles and shotguns, and limiting ownership to an extremely narrow range of purposes.

As a result, the government bought back nearly 650,000 of these weapons and now just 5 percent of Australian adults own and use firearms.  The gun homicide rate fell, mass shootings stopped, and gun suicides declined.

But that hasn’t stopped lobbyists like the National Rifle Association (NRA) from claiming that violent crimes and gun-related homicides in Australia have actually increased since the new laws were introduced.

The meme circulates anytime there is meaningful talk of gun reform in the United States.  But a quick look at and – go-to sources for checking the credibility of a rumour or claim – completely refutes the NRA’s statement as inaccurate and misleading.

From my cold dead hands?

Seventeen years later, Australia again looked to make sweeping changes and reform – this time to the financial services industry.  In July 2013, the country introduced the Future of Financial Advice, which required that advisors have a statutory “best interest” duty to their clients, and banned commissions on products directly related to advice.

Related: More ways the investment industry is screwing Canadians

The United Kingdom adopted similar reform when it introduced the Retail Distribution Review, legislation that prevents advisors from taking commission for selling products.

The results from both countries were predictable.  A ban on trailer fees, or embedded commissions, along with greater transparency for investors, means the cost for financial advice has fallen significantly.

The big banks, whose platform depended on “advisors” pushing in-house mutual funds, felt the biggest impact from these changes.  As a result, the number of advisors working for banks in the U.K. fell by 44 percent in 2012.

As the Canadian Securities Administrators mull over similar reform, the investment industry’s biggest lobbyists are fighting tooth-and-nail to prevent these changes from happening in Canada.

Decreased access to advice

The arguments are weak at best.  One argument, from Advocis president Greg Pollock, suggests that regulation in the U.K. has done more harm than good as up to 80 percent of consumers will no longer be able to access financial advice due to the mass departure of bank advisors.

But DIY investor services have exploded in the last two years, with total assets valued over $120 billion in 2013, up from $73 billion in 2011.  To bridge the “advice-gap” left behind when the banks shed thousands of advisors, new online investment services have popped-up offering model portfolios and light advice for investors with as little as $1,000 to start.

Related: How the behaviour gap affects investor returns

One firm has seen a 73 percent increase in investors wanting to take advice by telephone, rather than a face-to-face meeting.  And, finally, passive investments have seen record inflows in the year following investment reform.

But we like paying trailer fees

Another absurdity is that Canadians “prefer to pay for financial advice through fees that are part of their mutual funds.”

First of all, many investors don’t even know how their advisor is paid, hence the new emphasis on fee disclosure and transparency.

As Tom Bradley brilliantly quoted in a recent Globe and Mail column, “Our financial adviser is such a nice man. I wish we could pay him in some way.”

There’s a big difference between consumer preference and consumer ignorance.  I suspect that Advocis prefers Canadians continue to blindly pay the highest mutual find fees in the world.

Finally, the oft-quoted CIRANO study on the value of advice claims that those who work with an advisor have two to three more assets than those who don’t work with an advisor.

Related: Why Canadian investors aren’t as savvy as they think

The financial industry uses this study to oversell the value of advice.  But given the limited data in the report, even the author of the study, president of CIRANO Claude Montmarquette, said the study is completely refutable.

“We need a better study and a better paper before I would be comfortable with the way they are saying what they are saying,” he said.

Final thoughts

The financial industry can trot out all the tired old chestnuts it wants, but it is not a question of if, but when Canada adopts similar investment reform when it comes to banning embedded commissions and implementing a “best interest” standard of care for advisors.

Related: Why a fiduciary standard of care is needed in Canada

The industry will be forced to adapt sooner or later, as stiff competition from upstarts like the new robo-advisor services give consumers access to light advice and low cost portfolios for even the smallest investors – making the “advice gap” redundant.

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  1. Sandi on September 7, 2014 at 2:21 pm


    • Echo on September 7, 2014 at 2:31 pm

      I did.

  2. Dan @ Our Big Fat Wallet on September 7, 2014 at 4:57 pm

    Interesting to see the changes happening within the industry. It makes me wonder if banks will adapt to become more competitive. They’ve had it way too good for way too long. In some ways it reminds me of the Canadian real estate industry and the monopoly that Canadian realtors have had on the MLS system. There are finally some options available for buyers/sellers that save some serious money (ie. paying for an MLS listing but selling the home yourself) but to get to this point has taken years (if not decades)

  3. Lawrence A. Bennett on September 8, 2014 at 6:33 am

    It is time for the fee only advice model. I work as a consultant and produce a report that they can take to their accountant, lawyer and financial institution. I hate to say it but most companies are driven by commissions and trailers not necessarily the best interest of the client.

  4. Aman Raina on September 9, 2014 at 7:12 am

    Good overview. You’ve hit all the right notes. My concern is whenever it all goes down, there will still be an inherent conflict for advisors in that it’s pretty hard to educate people on investing and then sell them a product at the same time. Granted the industry doesn’t do a great job educating clients and resources like yours have to jump in to fill that gap. The reality is you have to separate the education from the sales and only if people decide to willingly become more street smart and money smart in their personal finances, will they truly have control over their financial future.

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