It’s time to ban adviser commissions

Should financial advisers be banned from collecting commissions on mutual funds? That’s been hotly debated for years, and in December the Canadian Securities Administrators (CSA) issued a discussion paper that considered the idea of imposing such a ban. Australia already did so in 2012, and the U.K. followed suit this January. But if it ever comes to pass in Canada, it would happen despite a strong lobby by Advocis, the Financial Advisors Association of Canada. And that’s a shame.

This week the chair of Advocis sent an email to advisers that started like this:

Every day your clients rely on you to help them achieve their financial goals. If you’re like me you depend on commissions to make your advice possible. How would you survive if there were no commissions? As strange as it may seem, that is the intent behind the recent consultations by the CSA regarding fees — including a ban on embedded commissions.

While this is currently limited to mutual fund trailers and DSC fees, there is no structural difference with life insurance commissions.

The way we do business is under unprecedented threat. Your clients’ access to financial advice is under threat.

Meanwhile, the president and CEO of Advocis penned an op-ed in the Financial Post that elaborated on the idea. It’s deeply disappointing that an organization purporting to advocate higher professional standards is blurring the line between advice and product sales.

A fundamentally different relationship

Advocis is wrong to lump together mutual fund trailers, deferred sales charges (DSCs) and life insurance commissions. Doing so ignores the distinction between a fee for a professional service and a commission on a sale. I’m not making a value judgement here: it’s just that fees and commissions apply to different types of transactions.

While life insurance brokers are responsible for servicing clients after a policy is sold, the reality is few people need ongoing advice after they purchase the product. I bought a term life policy 10 years ago and haven’t spoken to the broker since. He doesn’t call me every few months to make sure I’m eating healthy, exercising vigorously, and doing all I can to keep death at bay (and that’s a good thing, or he’d be disappointed). He doesn’t remind my wife that her windfall will be tax-free—and I’m grateful for that, too, because that might sound tempting. Sure, I’ll call him again when it’s time to renew the policy, or when my kids need insurance, so there’s some ongoing contact. But the same is true with my real estate agent, and I don’t pay him an annual fee for advice about home ownership. In both cases the relationship is based on sales, and commissions are appropriate.

With an investment adviser, the situation is completely different. Selecting appropriate funds for the client is (or should be) a fraction of the overall service. An adviser’s time is spent primarily on goal planning, risk assessment, tax planning, portfolio maintenance, behaviour management and a host of other ongoing services. None of that has anything to do with financial products. So why should a professional adviser be compensated primarily by mutual fund commissions?

That’s why it’s so distressing to hear the chair of a professional organization say, “If you’re like me you depend on commissions to make your advice possible.” The statement is just dripping with conflict of interest.

It’s about adviser self-interest

In his op-ed piece, the president and CEO of Advocis writes: “At the crux of the compensation debate in Canada is the desire to see the consumer properly advised and properly protected.” That’s disingenuous. Advocis’s lobbying effort has more to do with its fear that “removing this form of adviser compensation … would also drive advisers out of the industry.” The article goes on to point out that “already the U.K. has lost 25% of its adviser distribution network. And one industry observer has stated that as much as 80% of U.K. consumers will no longer be able to access financial advice.”

I have no idea where that 25% figure came from, and the opinion of the unnamed “industry observer” is rank speculation: it’s way too early to assess the effect of the ban on commissions in the U.K.

In any event, the adviser community in Canada would be more professional if it were culled by 25%, especially if all those losses were people who “depend on commissions to make their advice possible.” And unlike Advocis, I don’t buy the argument that a ban on commissions will “make financial advice inaccessible for the average Canadian.” It will simply force the average Canadian to look for a professional who charges directly and transparently for advice, rather than a salesperson whose focus is on peddling products.