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.