Insights and Market Perspectives

Embedded Commissions Debate and The Value of Advice

Author: Blake C. Goldring

December 15, 2017

The one conclusive thing that came out of the Canadian Securities Association (CSA) roundtable on embedded commissions in September is this: Our industry is divided by two divergent views on this controversial issue.

On one side, those who oppose embedded fees – and more specifically trailing commissions – insist they are synonymous with conflict of interest. This camp argues that those who are paid fees by mutual fund companies based on how long the funds are held, cannot have the best interests of their clients at heart. Furthermore, they insist many Canadian clients are unaware of the hidden fees and the innate conflict.

On the other side are those who view such fees as the cost of getting investment advice – something that is proven to enhance investment returns but is often neglected by Canadians, especially those with smaller portfolios. This group maintains that investors would be discouraged from seeking advice if they had to pay for it up front – especially those with relatively modest portfolios.

At AGF, we have a strong point of view on this issue, one that’s rooted in our long-standing faith in the value of advice.

In brief, we believe the termination of trailing fees and other embedded commissions would be disruptive and costly for the sector – especially at a time when new regulations (specifically CRM2) have just enhanced transparency and disclosure. Above all else, there is no evidence that clients want the current fee structure to change.

Regulators play an important role in preserving confidence in capital markets through regular review and enforcement of rules. But their actions can have unintended negative consequences. Banning embedded commissions is a perfect example of this jeopardy.

Research conducted by The Gandalf Group, furthermore, quantifies the risk of creating an advice gap for Canadian investors. A quarter of those surveyed indicated a ban of trailing commissions would be a disincentive for seeking advice.

That’s a legitimate concern in light of the experience in the U.K., which banned trailing fees in 2008. There, the changes led 11,000 advisors serving an estimated 11 million clients, to leave the business – and leave them without ready access to investment advice.

In citing this example in a paper published in July 2017, Henri-Paul Rousseau of the School of Public Policy at the University of Calgary wrote: “The dangers of this “advice gap” are being downplayed by those who believe robo-advisors and banks can fill the need instead. In fact, robo-advisors and banks are mostly not equipped to step into the gamma role of coaching their clients.”

This is an even more pressing concern at a time when geopolitical uncertainty, turbulent markets and record household debt are converging with the need for Canadians to learn the ABCs of Financial Literacy and take a more direct responsibility for their own long-term financial and retirement planning.

The CSA will release the results of its deliberations in the spring of 2018. Whatever the outcome, there will likely be further – and intense – debate on this topic. The most important thing of all, however, is not what various factions in our industry believe. What is most important is what is best for the long-term financial health of Canadian investors.

About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

For further information, please visit

© 2018 AGF Management Limited. All rights reserved.

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