Advisors react to commission ban idea

Last week’s opinion piece on commissions by Jason Pereira brought a wave of reader feedback into the Advisor.ca inbox. This came as no surprise, as the suggestion that regulators banning upfront commissions would entail a radical restructuring of the dominant business model, affects not only advisors, but clients, investment fund companies and insurance carriers.

Several of the e-mails questioned how younger advisors could possibly get started without the financial boost that upfront commissions provide. Others thought the ban would send clients into the arms of salaried bank-based advisors, while some questioned Pereira’s motives.

Carl K. Mason, AICB, an advisor with Partners in Planning, wrote:

“Mr. Pereira’s lofty opinion that people will get better service if their advisor is not on commission makes me laugh. It is so incredibly naïve that it makes me wonder what he recommends to his own clients.

I can say with confidence that the average fee based advisor cannot afford clients with assets less than $50K…don’t they deserve advice? How much advice is Mr. Pereira giving his clients under $50K?

The banks command billions of dollars in Canadians’ personal savings and yet they didn’t ever talk about giving advice to clients (other than the very affluent) until their coffers were being attacked by mutual funds salespeople…yes…making commissions. Where would the industry be today?

‘Commission’ isn’t a dirty word. The life industry and the mutual fund industry wouldn’t have been born and certainly not thrived. If you eliminate commissions then you eliminate/restrict new products, competition, new advisors and client choices in all of the above.”

Gerald K. Burgess, a CFP with Burgess Leclerc Financial Group Inc. in Toronto, pointed out that experienced advisors would be justified in charging a premium fee, but that they would be susceptible to losing business to those with lower fees.

“With almost 30 years of experience and a practice living upon trust built up over that time I would expect to have to charge a higher fee than a newcomer with no experience,” he wrote. “Are we to become like our lawyer friends who keep a log of the minutes spent and then bill? Or can we continue to give unlimited advice to our clients who rely on our expertise?”

The negative feedback did not come as a surprise.

More of a surprise was that much of the response was positive.

Jim Stewart, CFP, an advisor with IPC Securities Corp. in Waterloo ON, wrote:

“This is an issue that I support wholly.

There are in my opinion so many benefits to the consumer and the industry as a whole from banning the huge upfront commissions relative to insurance products and the DSC upfront fees on mutual funds.

There is a need for complete “transparency by full disclosure” of all fees that an advisor receives. Such a move would enhance the image of each advisor.

Any advisor who chooses to explain fees and also chooses a fee-for-service approach is doing himself and the industry great credit.”

While Pereira’s comments were sparked by Britain’s Financial Services Authority implementing a ban on commissions effective 2010, it was pointed out that other jurisdictions are also ahead of Canada on compensation transparency.

Ken Rousselle, president and CEO of Professional Investment Services (Canada) Inc., in Markham, ON, wrote:

“Jason, I applaud your stance on commissions. Our parent company is from Australia, where they have instituted full disclosure of commissions to clients (actual dollar amounts by year) as well as educational standards. These have all but eliminated front-end commissions across all product lines.

While I don’t necessarily believe upfront commissions are a ‘bad’ thing, they are obviously associated with many of the problems associated with our business.”

But tackling embedded compensation is only one step of a larger compensation overhaul. Rousselle also pointed out that the cost of training in the insurance career shops is embedded in the cost all products, forcing independent advisors selling those products to subsidize the training of the career agents.

“For example, Sun Life / London Life / Investors Group, could effectively price in the ‘hidden’ cost of building large distribution networks and not pass those embedded costs on to independent networks in the form of training allowances, etc. in order to assist independent networks to grow. This could potentially have a dramatic effect on distribution going forward.

Related Articles

• Opinion: Canada should ban commissions too
• British regulator bans commissions

(07/06/09)