The Canadian Securities Administrators (CSA) has issued a proposal to ban mutual fund embedded commissions. This would force financial advisors to charge their clients directly instead of getting commissions from the mutual funds that hold their clients’ investments. Whether this makes sense depends on how we view the mutual fund industry.
There are two extreme narratives that characterize the fund industry in Canada. Which one you think is closer to the mark will likely decide whether you support CSA’s proposed changes.
Narrative 1: Financial advisors are hard-working professionals who must be paid for the initial work they do for their clients and must be paid a lesser amount each year for their ongoing work helping their clients. Paying the advisors out of client assets within mutual funds is just a convenient way to complete the transaction with a minimum of hassle for clients.
Narrative 2: Mutual funds that pay trailing commissions know that investors are clueless about costs and have conspired with advisors to increase fees to punishing levels and split the spoils. The embedded commission model is designed to keep investors in the dark.
Obviously, there is some truth in both narratives. But which one dominates? As the latest changes to the Client Relationship Model (known as CRM2) come into full effect, no doubt reality will be pushed somewhat away from Narrative 2, but how much? Is CRM2 enough or do we need to ban embedded commissions entirely?
My own opinion is that there is too much truth in narrative 2. There are certainly some good pockets within Canada’s mutual fund industry, but banning embedded commissions is needed. If it happens, it will cause big changes.