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On Tuesday, the Canadian Securities Administrators (CSA) released a much awaited consultation paper, “Consultation on the Option of Discontinuing Embedded Commissions.”
We say “much awaited” half tongue-in-cheek. Much in the same way that a large number of Canadians have no idea how or how much they pay for investment products / advice, we expect even fewer are aware of the potentially seismic shifts that are taking place in the regulation of investment advice and advisor compensation practices!
As the title of the paper suggests, the regulators are considering banning the practice whereby investment advisors are compensated by investment product dealers directly through the payment of commissions embedded in fees charged on products such as mutual funds, structured products and others. Conflict of interest is the key issue that the paper’s summary highlights, as follows :
1.) Embedded commissions raise conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of investors;
2.) Embedded commissions limit investor awareness, understanding and control of dealer compensation costs;
3.) Embedded commissions paid generally do not align with the services provided to investors.
The discussion is moving past “if” and heading towards “how” embedded commissions should be banned
