Embedded Commissions: The Anathema to Honest Financial Advising

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Imagine this: you went to see your accountant to get some advice on your books. You want to make sure that everything’s in order, because you’re mostly sure that you did everything right, but a second opinion would be great. So you go to your bank and talk to your bank-provided accountant, who quickly skims through your accounts and then says that it’s mostly fine, but you’d really benefit from this calculator which will help you get it done more quickly by yourself, and have you considered maybe using this program which has a monthly subscription but will organize your books so much better, and maybe this special pen with blinking lights because studies indicate that the extra stimulus will help you stay awake while doing your taxes at 3am…

No doubt, you’d think your accountant was crazy. But that’s the kind of crazy world in which financial advisers have to live: a sales-based industry in which the primary goal is not to inform and enrich clients but to sell extraneous, ancillary products, all of which are presented as serving the client’s best interests but in actuality are mostly about earning a commission.

Many financial advisers are trapped in an industry which encourages them to see clients not as people seeking honest advice but as potential customers. Advisory positions only have merit if your adviser is an adviser, not just a salesman behind an official-looking desk.

But that’s how much of the finance industry operates. Most mutual funds carry embedded commissions, which crucially means that advisers aren’t paid by the investors but by the fund company. This puts investors disproportionately at the mercy of the integrity of their adviser, especially since the complex, oft-nebulous nature of investment is much harder to assess than a physical product for the average investor unfamiliar with the industry’s many, many intricacies.

This effectively leads to a situation akin to, as CARP chief operating officer Wanda Morris described, a real estate agent trying to sell an overpriced apartment for which a developer is offering a double going commission.

Except that in this scenario, the agent has wrapped a blindfold over their client’s face.

Unfortunately, despite this serious issue of trust that permeates the financial sector, embedded commissions have remained in place after the most recent decisions passed on June 21 by the Canadian Securities Administrators, the governing body regulating Canada’s capital markets. While new regulations have addressed concerns such as conflict-of-interest and deferred sales charges (DSC), the central element compromising client-adviser trust remains.

Despite two proposed reforms which could have made waves in the investment world, the CSA has resolutely decided to not rock the boat and instead contents itself with ripples. These are compromises made for the benefit of the fund companies, not the advisers who work for them nor the clients who trust in them.

Until the CSA is willing to take the next big step in assuring a client-first industry, clients must rely on the potentially-biased commissioned advisers, or seek out fee-only financers who aren’t pressured by fund companies but consequently have higher prices. Fortunately, new technologies are gradually helping to reduce the cost of financial services, such as advice and planning, so it may be that a fully-fledged alternative to these two extremes may soon develop and let investors use the power of the market to end embedded commissions.