by Tom Bradley

“Our financial advisor is such a nice man. Every year he takes us out for a wonderful dinner. I wish we could pay him in some way.”
- Parent of a friend, April 3, 2013

“I’m looking to move my account. My advisor is switching me over to what he calls an asset-based fee of 1%. I’m pissed. I didn’t have to pay anything before.”
- Prospective client, April 11, 2013

“There are those who know and those who don’t. All the advantages go to people who know.”
- Glorianne Stromberg

These quotes were part of our submission to the Canadian Securities Administrators (CSA) on mutual fund fees in 2013. They probably tip you off as to the state of fee reporting in Canada.

Last week, the CSA came out with a series of reforms to make the investment industry more client friendly. It laid out new rules around client information, product knowledge and suitability, and disclosure of conflicts of interest.

What the proposals didn’t do, however, was ban the use of embedded commissions, or what’s known as trailer commissions. Advisors will be able to continue tucking their fees into the cost of the products they put in their clients’ portfolios. (Fortunately, discount brokers will no longer be able to collect trailers because they’re not licensed to provide advice.)

In trailer fees we trust

Trailers represent the portion of the mutual fund fees that go to the dealer. The client doesn’t readily see what he/she is paying for service and advice. With enhanced reporting rules instituted in 2017, advisors have to show the fees they received from mutual fund companies (once a year at a minimum), but it takes some effort on the client’s part to find, or they may miss it altogether.

Investing and the way the investment industry works is confusing enough for people. The CSA has done research which shows that many investors don’t understand trailers, or worse, aren’t aware of them. Trailers perpetuate what Glorianne Stromberg refers to above as the ‘knowledge gap’. The people ‘who know’ (advisors) are left holding all the cards relative to their clients.

If, on the other hand, trailers weren’t allowed, then advice fees would have to be negotiated between the client and advisor. And if clients saw the charge come out of their account on every statement, the knowledge gap would narrow.

A big win for the industry

This was the headline of an Investment Executive magazine Op-ed last week. I think this view is short-sighted. Yes, the reprieve from a ban allows a shrinking majority of advisors, dare I call them dinosaurs, to continue using trailers, but meanwhile the whole industry is subjected to a new set of rules and boxes to tick. The proliferation of new rules isn’t strictly linked to embedded commissions, but I have to think that allowing trailers to continue added a few compliance rules and redoubled the CSA’s efforts to hold dealers to account.

The CSA really had no choice but to raise the bar with prescriptive rules that will (hopefully) get more advisors to act in the best interests of their clients. Leadership on issues related to the clients’ best interests has fallen to the regulators because industry players haven’t lifted a finger to disclose conflicts, improve reporting and track client outcomes. The evidence is overwhelming that too many advisors and firms are skating around the existing rules to obscure what clients pay. A string of fines and misdeeds over the last two years related to double charging and hidden incentives reinforces this.

Conflicts, what conflicts?

As you can tell, I’m disappointed by the trailer fee decision. I invested a lot of time on this issue because I felt the regulators needed to hear the other side from someone on the front lines, not in an ivory tower. But that aside, it’s a bad day for Canadian investors. Instead of getting rid of a major source of deception and conflict of interest (advisors dependent on trailers won’t consider non-trailer products, even if they’re better for client portfolios), the CSA is allowing it to continue with the condition that dealers must disclose their conflicts more clearly. I know what you’re thinking – Good luck with that!

Steady as she goes

To be clear, my disappointment doesn’t emanate from how the new rules will impact Steadyhand. We don’t have all the details yet, but we expect to be one of the winners. The new rules will increase our costs and probably make our client service more invasive (“Mr. Smith, we’re calling because we’re required to update your background information.”), and I might have to put a new title on my business card (Mutual Fund Salesperson), but we have a simple business model and our level of care is already very high. Compared to other dealers who offer a multitude of products and lack the systems to meet the new requirements, we’re golden. We also have Neil and Elaine at the controls, which means we can move quickly and use technology.

The enshrining of trailer commissions also helps us differentiate ourselves. While other players wallow in multiple compensation schemes and behind-the-times opacity, the transparent Steadyhand service will look better and better, as will our lack of conflicts and cross selling. A key differentiator of our business model, after all, is that we don’t pay trailer commissions.

For our competitors, the trailer fee ‘win’ comes at a huge cost and if Canadian investors end up losing in the end, they will too.