Banks to CSA: robos not ‘attractive alternative’ in event of commissions ban

CIBC’s Steve Geist and National Bank’s Martin Gagnon both understand why CSA aims to crack down on embedded commissions. But, that doesn’t mean they agree that doing so is necessary.

Geist, group head of wealth management for CIBC, says in his comment letter that, as “a manager of several families of mutual funds,” the bank supports the goal of increasing transparency and “reducing the complexity of fund fee structures.”

Still, CSA should first measure the impact of current regulatory initiatives, including CRM2 and the proposals in 33-404, as well as consider the potential negatives of discontinuing embedded commissions, he stresses.

Similar to other industry players and advisors, Geist points in his letter to how investors might be affected by a ban. He notes, “CIBC has participated in working groups established by [IFIC, IIAC and PMAC], to study the Paper, and we share many of the [same] concerns.”

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In a speech last week, Investment Funds Institute CEO Paul Bourque took a stand against embedded commissions. He argues there’s no evidence that a ban on embedded commissions will help investors and that investors should be given a choice in terms of how fees are paid.

During his speech, he said, “Banning embedded commissions will have long-term negative impacts on the ability of Canadians to plan and save, leaving them with substantially lower levels of assets to fund their retirement.”

He also pointed to a PwC study that finds banning embedded fees in mutual funds could result in individual Canadian investors accumulating less in retirement savings than they would have with access to advice. Read the full story about his speech.

Read: Industry response to embedded commissions ban: IFIC and Advocis

In particular, Geist is worried about “less affluent Canadian investors” and those who work may not be willing to pay more for advice or to use robo-advisors.

If changes are made, he adds, market participants must have “sufficient time to structure their operations, educate their clients and refine their offers.”

Read CIBC’s full letter.

Gagnon, executive vice-president of wealth management at National Bank, directly answers many of CSA’s 36 questions in his letter. He says he’s happy to “rationalize the fund series” and support transparency, but he has many concerns.

Like Geist, he finds CRM2 has addressed issues related to embedded commissions and conflicts of interest. Plus, he says, “The current significant movement toward fee-based accounts would be interesting to follow […] to determine whether that could fix the issue, or a part of it,” leading to increased investor awareness.

Gagnon also doubts the draw of robo-advisors, saying some clients may be uncomfortable or less familiar with technology. “For clients wanting face-to-face advice, rob0-advisors are not an attractive alternative,” he argues.

Read:

• CSA’s embedded commissions ban falls short for clients, say advisors
• Time for advisors and robos to declare a truce

Overall, he’s most concerned with the impact on small firms that may not be able to set up fee-based platforms or invest in technology. He says, “Some dealers may even simply decide not to continue to operate […],” which would disadvantage the Canadian industry.

But, says Gagnon, if a ban on embedded commissions must occur, “we think regulators should aim to have a level playing field such that all of these products should be encompassed by the ban.” (In its paper, CSA lists mutual funds, structured notes and non-redeemable investment funds).

The only exception, he adds, should be no-load A-series securities, “for which clients pay no up-front commissions and only trailing commissions,” which clients must be informed about under CRM2.

Read: Commissions ban could push advisors to sell insurance products: MFDA

Such a move, Gagnon explains, “would allow modest investors to continue to have access to advice […],” which would reduce the potential risk of investors paying higher fees and/or switching to products that won’t help them build wealth, says Gagnon.

To further level the field, Gagnon suggests discontinuing payments to dealers and reps related to marketing and education, but he does not think referral fees should be prohibited.

To properly introduce changes, he suggests a transition period of no less than 36 months. “Anything less would not be feasible.”

He hopes CSA will see regulatory action isn’t needed after all, as he argues the industry will transition away from embedded commissions on its own. Gagnon says that F-series funds are becoming more popular, and that fund companies are voluntarily cutting management and administration fees.

Read National Bank’s full letter.

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