Canadians need to be able to save towards their retirement and other financial goals effectively and efficiently. At present, the ability of Canadians to achieve financial security in retirement is in doubt. Embedded commissions (also known as "trailing commissions") and DSC mutual funds have hindered many families and investors in their goal of saving enough for their retirement or other financial goals.
Prohibiting DSCs and prohibiting trailing commissions through discount brokerages or OEO firms, will address two egregious practices that harm investors and we support those proposed changes.
DSCs are a form of embedded commission (paid at the point of sale) that needs to be prohibited. They are rife with conflicts of interest, target the most vulnerable investors and there is strong evidence of mis-selling, in addition to the DSC funds themselves being suboptimal investment vehicles for investors. Recommendations as to the type of payment structure for "advice" (DSC, Front End, Fee-Based, etc.) are not made based on the best interests of the client or what is most suitable or appropriate for the client, but on the revenue or financing needs of the representative.
Investors therefore are not given a "choice" by their dealer, as to whether to choose front load funds, DSC funds or have a fee-based account, but rather have these choices limited and determined by the representative based on representative's revenue requirements.
In our view, there will not be any lasting material impact on the ability of dealer firms and their advisors to develop and sustain a business model without DSCs. As they have done ably in the past (e.g. negotiated trade commissions, OEO trading and CRM requirements), firms are resilient, adaptive and will innovate and adjust. Regulators and governments should not be concerned with a business model wherein DSCs are claimed to be needed for the business model to be viable given the serious conflicts of interest with DSCs and resulting harms to investors and other problems. If the government is concerned about the impact on certain advisors who are overly reliant on DSCs for the viability of their business, then transitional assistance could be considered by regulators and the governments if determined to be necessary. Discontinuing DSCs will further the Ontario government's commitment to making Ontario a more competitive place to invest, grow and create jobs. This holds true for other provinces and territories. DSCs inhibit effective competition and market efficiency (as well as harm investors).
Mutual Fund Investors at OEO Firms or Discount Brokerages Should Not Be Paying Trailing Commissions
FAIR Canada calls for the immediate elimination of embedded commissions from investment products sold at discount brokerages given that IIROC Dealer Member Rules
do not permit discount brokerages to provide recommendations. For years Canadians have incurred significant unnecessary and unjustified charges given they have received no advice or product recommendations of any kind to justify the trailing commissions. FAIR Canada recommends that all firms offering a particular mutual fund
be required to offer the "F" class version of the fund at discount brokerages rather than urged to offer trailing commission free versions. If a "F" class exists, it should be required to be offered through the OEO firm for those investors who want to invest without advice. FAIR Canada questions the reasonableness of having any embedded commission (even if reduced such as with "D" series funds) associated with mutual funds purchased through discount brokerages. The CSA should critically assess whether the investor actually receives any services to justify the ongoing trailing commission. It may be possible that the trading costs per individual account at discount brokerages increase modestly due to the removal of embedded commissions from mutual fund purchases. We believe that this is fair as mutual fund investors should not be required to subsidize the costs of other users of the platform.
We recommend that the Proposed Amendments be implemented as soon as possible. A timely response to market failures and investor harm is important so that those harms can be redressed.
To read the full submission click