The retail investment industry is eagerly awaiting some indication from regulators on the fate of embedded commissions. As such, most compliance officers (COs) and company executives surveyed for this year’s Regulators’ Report Card want regulators to take action. Specifically, survey participants said they don’t necessarily want a ban, but they do want clear policy direction on this issue, which has hung over the industry for far too long.
Survey participants were asked in a supplementary question in this year’s Report Card about whether they favour regulators taking some sort of action on embedded commissions. The results revealed that 70.5% of survey participants want the regulators to do something. Yet, much like the regulators, survey participants were far from unified on just what regulators should be doing.
Some survey participants were decisively in favour of a straightforward ban on these compensation structures; other participants want to see less definitive measures, such as efforts to enhance transparency. Meanwhile, a meaningful minority (29.5%) said regulators shouldn’t be doing anything at all about embedded commissions.
This lack of consensus on what should be done with embedded commissions even had some COs and company executives admitting that they’re of two minds on the issue and were torn between what they see as the right thing to do for clients (eliminating pay structures that could be viewed as being conflicts of interest) and what’s good for the industry (i.e., the status quo).
For example, a senior CO with a large, national investment dealer in Ontario had different answers regarding this issue, depending on whether it is looked at from the industry’s perspective or that of clients.
“Answering this question is hard because it ultimately comes down to the audience,” this CO says. “Speaking on behalf of the firm, probably [no to regulatory action] because I suspect for most, [banning embedded commissions] would create challenges. Speaking purely whether or not I think [a ban] makes sense might be a different issue.”
Similarly, a CO with a small, independent mutual fund dealer in Ontario would prefer to see regulators address the issue, but also worries about the impact on the industry: “As a compliance officer, [my answer is] yes [to a ban on embedded commissions]. But, as someone who also works in this industry and really likes working in this industry, I think [a ban] is dangerous.”
Even for survey participants who said they want to see regulators take action on embedded commissions, there’s no consensus on just what that action should be. In fact, some survey participants said they view a ban as the clearest, most straightforward option.
“We need to move past [embedded commissions] as a [compensation] model,” says a CO with a large, national investment dealer in Ontario.
“Obviously, there’s conflict of interest among the firm, [financial] advisors and clients,” adds another CO with a large, national investment dealer in Ontario. “Getting rid of [embedded commissions] is a simple answer.”
Other survey participants reluctantly support a ban despite their misgivings about what that could mean for the industry.
“I’m in favour [of a ban on embedded commissions],” says a CO with an investment dealer in Alberta. “Oh Lord, that will be a lot of work, but it needs to be done.”
Indeed, many COs worry that a ban on embedded commissions will have too big of an impact on dealer and advisor revenue.
“[Embedded commissions] should stay,” says a CO with an exempt-market dealer in Alberta. “If we keep regulating stuff, we’ll end up so that there’s no way to charge for anything and there will be nobody left in the business. Nothing is for free. These people work hard, and if you take away the ways for people to make money, how are they going to survive?”
Among survey participants who oppose a ban, some said they would be in favour of the regulators taking other, less dramatic forms of action, such as improving the disclosure and transparency of these fees, eliminating deferred sales charges and standardizing trailer fees.
Other survey participants said regulators should go beyond merely banning embedded compensations structures and embrace even more fundamental reforms to deal with compensation-related conflicts properly.
For example, a company executive with an independent, full-service dealer in Ontario said that simply banning embedded commissions and moving most clients to a fee-based system wouldn’t eliminate conflicts of interest; rather, doing so would merely shift the industry from one troubled compensation model to another.
“The problem is not embedded commissions; the problem is charging based on a percentage of assets,” the executive says. “In my heart, I think that as an industry, we should be moving to hourly billing and away from commissions of any sort or even [from] fees as a percentage. I think that [doing that] would do the investors good, and it would do the industry good. That would make [our business] more of a profession than a sales job.”
Despite this wide diversity of views, the one thing most survey participants agreed on is that the regulators must decide what they’re going to do once and for all.
“One rule or another is fine. Right now, [regulators are] wishy-washy, and that makes compliance tough,” says a chief CO at an investment dealer in Ontario. “They don’t want [embedded commissions]? Fine, then just say so. But at least let us know.”