The point: I stand to benefit if embedded commissions in mutual funds are banned, and if a fiduciary standard for advisors is enacted. I don’t think it invalidates my argument, but – unlike some of the voices clamouring against the increased safety for investors – at least you know why I’m arguing for it.

Let’s not be coy: I’m a financial planner. My reason for writing Spring (the blog) is so that potential clients will read it and decide that they want to pay me for advice about their money.

My business model is what those familiar with the industry call “fee only”. Most regular people don’t really know what this means, which is why we fee only financial planners talk a lot about why we sell our advice and nothing else, and have “Fee Only Financial Planner” written prominently on our business cards, LinkedIn profiles, and everywhere else we can manage to put it. We usually stop short at tattooing it on our kids.

Speaking of regular people, they are the people I work with. Average, ordinary Canadians who work because they have to, wonder if they’re saving enough, are working on paying down debt, and have the potential to wrestle their finances into submission, but are just starting out, don’t have the time to dedicate to it, don’t know quite how to approach the problem.

I obviously believe that pursuing this model will let me earn enough money to pay my mortgage, buy groceries, and keep my kids in clothes (and boxes), or I wouldn’t do it.



These kids.  These boxes

Here’s where things get tricky: if I didn’t have the best interests of my clients in mind, how would they know? It’s not enough to just say the words; anyone can do that.

How do you know that your advisor is putting your best interests first?


Studying for and passing the exams to become a Certified Financial Planner® is recognized across North America as a standard of knowledge and voluntary ethical behaviour in the industry, but does it guarantee that the advisor is going to put your financial interests above his own? It doesn’t.

Can you tell by his actions? That depends on how much you know. Think about Barry Choi’s story (with Big Cajun Man at Canadian Personal Finance, and with Preet Bannerjee on the Mostly Canadian, Most of the Time podcast) He had no idea that the funds his advisor bought for him had high expenses and would cost money to sell of he wanted to hold them for less than seven years, because that “advisor” didn’t disclose those details.

That’s an example of egregious wrongdoing that regulations already exist to protect against, and because of those rules, Barry was able to get his money back and invest it himself (in index funds).

But what if his advisor had met the minimum disclosure requirements? What if he had specifically disclosed to Barry that the cost to invest in the funds he was advising would be 2% of the invested money, and that there would be be fees charged to him if he withdrew or transferred his money before the seven year mark?

Would that have ensured that he was acting in Barry’s best interest?

No, it wouldn’t, and here’s why:

  • When he opened his account, Barry wasn’t confident enough in his own knowledge to ask why that fund in particular was being advocated, or to evaluate the validity of the advisor’s argument.
  • Barry was in a client relationship with someone who was going to manage his money for him. He was reluctant to demand more information than was offered to avoid sounding adversarial.
  • Barry assumed that the advisor was legally required to act in his best interest. He wasn’t. He was legally required to offer investments that were suitable to Barry’s time horizon, investment knowledge, and risk tolerance, which is a totally different thing.
  • Barry didn’t know – and wasn’t required to be informed – that his advisor would be paid an ongoing commission, paid for out of the disclosed management fees, for the entire time Barry stayed invested in that fund.

I happen to be very familiar with the compensation structure of the particular organization that Barry’s advisor was representing. That company pays a direct commission to its salespeople that varies in value depending on the type of investment it is. The highest commissions are paid on actively managed, equity based mutual funds that charge fees if you withdraw your money before the end of a pre-determined period of time, usually seven years. The lowest commissions are paid on money market funds. They don’t sell index funds.

At the big banks, advisors are paid a salary, which allows them to say that they’re not directly compensated for mutual fund sales. The fact is that those advisors have precise sales targets upon which that salary – and the possibility and degree of further pay increases – depends on meeting those targets. What sales are most highly rewarded? Actively managed, equity-based portfolios. The sale with the lowest rewards? Money market and index funds.

This isn’t an argument against actively managed mutual funds (although I think there’s an almost water-tight one to be made against the ones with the highest costs). This is an argument against compensating advisors based on the type of expenses they can incur for their clients, and – just to throw the net as wide as possible – it’s an argument against compensating advisors for the sale of anything except their advice.

Let’s lay it all on the table: my business stands to benefit if embedded commissions in mutual funds are banned, as is being proposed by the Canadian Securities Administration, the Ontario Securities Commission, and supported by organizations like FAIR Canada.

There are good people whose careers are built on the embedded commissions model. They are facing an enormous problem making a living if the ban goes through, if they can’t successfully transition their book of clients to a fee only or fee based model*.

If the only thing these advisors will be able to sell is their advice, they’ll have to demonstrate that they can do more than just pick out and sell mutual funds. They’ll have to offer enough value that regular people will pay for it upfront, instead of buried and forgotten inside a mutual fund account. Most importantly, they’ll have to offer actual financial planning, instead of just investment advice.

It won’t feel free anymore, which is why Greg Pollock, head of Advocis and defender of the commission and disclosure laws as they stand today, argues that the 80% of investors who currently invest through commissioned advisors (and due-paying members) will balk at the bill and stop seeking advice altogether.

Canadians are smarter than that. If they knew what their choices actually were, they could choose visible or invisible fees. But they don’t know that they have a choice. They’re going to advisors who offer financial planning as a loss leader for their income-producing sales, believing that the advice is free and their best interests are being looked out for.

What if we just required advisors to disclose the embedded fees?


Increased disclosure sounds like it would solve the problem. Require advisors to explain precisely how they are compensated, by whom, and for what, and consumers will be able to make informed choices based on their own requirements, right?

Consider the fact that they are consulting an advisor in the first place. It means that they either don’t trust their own ability to investigate and make good financial choices, or they don’t have the time to do the necessary work.

If they lack confidence in their own abilities, where will they get the confidence to evaluate the motives of a commission earning advisor who has just told them to invest in ABC fund? If all we do is make embedded fees part of the required disclosures, how likely is it that they’ll weed through the 200 pages of annual report, prospectus, know your client statement, and account opening documents to find it?

What client, unsure of his own abilities, and confident enough in his advisor’s expertise to agree to sit down with him in the first place, will take the time to read through – let alone question – all of the relevant information while their advisor sits across the desk watching him, and the next client is waiting impatiently in the next room?

Leave it up to the advisor to disclose verbally, and you get the equivalent of small print disclosures read by high speed robots in a pharmaceutical commercial. Or you get Barry’s case, which – remember –  wasn’t red-flagged by an industry ombudsman sitting in a back office somewhere, but was only resolved because Barry noticed something was wrong and made enough noise to get it fixed (and had kept all of his emails and paperwork to prove his case). How often do similar situations go unaddressed because investors lack the confidence or knowledge to get them resolved?

Banning embedded fees is only half the problem


If the Canadian Securities Administration does ban embedded fees, that still won’t ensure that advisors will put the best interests of clients before their own financial gain, which is why it is also proposing a statutory fiduciary standard – finance speak for “it’s against the law to give advice that isn’t demonstrably in the client’s best interest”.

Regulation doesn’t fix everything. It won’t make every advisor magically competent and ethical. But in this case, regulation is necessary because the people it is designed to protect aren’t even aware that they need to be protected, and the people they need to be protected from can talk really, really fast.

*Fee-based is a different model from fee only: fee based advisors charge a fee to manage your investments for you, based on the percentage of the assets you hold with them, and may charge other fees for planning services. There’s more to talk about that, but not in this post.




Sandi Martin

Sandi Martin is an ex-banker and fee only financial planner who specializes in working with regular folks who suspect their money might be a bit of a mess. She lives in beautiful Muskoka with her husband and three children, and works online and by phone with clients across Canada.

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