by Tom Bradley

“After thorough examination, the CSA (Canadian Securities Administrators) find that the prevailing practice of remunerating dealers and their representatives for mutual fund sales through commissions, including sales and trailing commissions, paid by investment fund managers (embedded commissions) raised a number of investor protection and market efficiency issues that suggest a need to consider change ...”

“... we have decided to consult on the further option of discontinuing embedded commissions and transitioning to direct pay arrangements ...”

These excerpts from a CSA Staff Notice that came out yesterday. The message is clear. Trailing commissions, or trailers, are going the way of the dodo bird. It’s not a matter of ‘if’ they’re phased out, but ‘how’.

This is an issue I’ve been very involved in both publicly in the Globe, this blog and at conferences, and behind the scenes, so I want to make a few comments.

  • First of all, I’m pleased. There’s a lot of positive change going on in the wealth management industry right now, including the new reporting standards (CRM2), but the transition would have been incomplete if the CSA hadn’t dealt with embedded commissions.
  • The dealer network is under extreme pressure to adapt to a raft of regulatory changes. Under Neil’s leadership, our firm has long since exceeded the CRM2 requirements, but other firms are in the middle of it. So, I’m sure the trailer ban is an unwelcome addition to the project list. As I’ve said many times, however, the industry brought this on itself. It failed to take leadership on some basic, must-do requirements for serving clients, namely clear reporting of what clients are paying and how they’re doing. Yes, it’s hard to believe, but this trillion-dollar industry doesn’t readily provide this information to its customers.
  • Although the trailer announcement adds to the burden, I think the timing is helpful. As dealers are making changes to their processes and systems, they need to know where the industry is ultimately going.
  • In Toronto last week, a senior executive of a fund company told me that the change going on in the industry right now is nothing short of remarkable. Dealers are moving quickly to get ready for the CRM2 deadline (there’s nothing like a deadline). I’ve also heard some of the changes are occurring due to “market forces” (i.e. what clients want) and speculation that trailers were in jeopardy (the CSA has not hidden its concerns). Dealers were moving on the trailer issue ahead of this week’s announcement.

At Steadyhand, we’re feeling the regulatory burden like everyone else – the next wave of changes related to the client relationship will negatively impact our ability to serve clients if enacted as proposed - but I nonetheless commend the regulators for filling the leadership void and making the wealth management industry just a little more client friendly.