Since well before my time in the financial services industry PWL Capital has been one of the strongest advocates for improving the experience of Canadian investors. Not only has the firm been an advocate, we have been leading by example. We were offering fee-based accounts, index fund portfolios, performance disclosure, and comprehensive advice well before consumers were asking for them, or regulators were requiring them.
Advocacy from PWL and firms with a similar stance has played a role in improving regulations. We have seen a requirement to disclose fees and performance with CRM2, and more recently we have seen proposed improvements to the suitability standard that most financial advice must adhere to. We have also seen the result of consultations, lasting years, on embedded trailing commissions and the deferred sales charge (DSC) used by many commission-based financial advisors.
In June, the Canadian Securities Administrators decided that they would maintain embedded commissions, but ban the DSC. Those proposals were released in September, and were met with surprise opposition from the Ontario government.
Advocis, an industry group that largely represents insurance and mutual fund salespeople, praised the decision of the government. The President and CEO of Advocis, Greg Pollock, stated
Our intention as an association is to ensure Canadians have equal access to trusted financial advice. Today’s announcement demonstrates that the Government of Ontario shares that vision, and intends to work alongside stakeholders to protect consumers.
The typical household in Canada starts investing with less than $25,000 and 80% of Canadian households have less than $100,000 in total investible assets. Restricting access to professional financial advice would make it harder for the public to save, invest and achieve their financial goals.
The argument follows that eliminating the deferred sales charge makes it harder for investors with small accounts to access financial advice. For example, taking on a $25,000 account as a fee-based advisor charging 1% results in a monthly revenue stream of about $20. On the other hand, a commission-based advisor using the DSC would earn an upfront commission over $1,200. It is obvious, from the perspective of the advisor, why DSC makes it more attractive to work with smaller clients.
There is a big problem with this scenario: funds that offer DSC are actively managed and have high fees. Is owning a product like that worth it to get access to what Pollock is referring to as professional financial advice? Let’s back up and think about what exactly professional financial advice might be. Obtaining a mutual funds license requires one course that the Canadian Securities Institute estimates to require 90 - 140 hours of study, and a 90-day training period. The cost to the consumer for that “professional advice” on a $25,000 account at a 2.5% annual fee is $625 per year, and growing as they add more assets. Not to mention the implied cost of an actively managed fund’s statistical likelihood of underperformance.
At a time, this was what it was – there were no alternatives. Today there are plenty. There are fee-only financial advisors, not tied to any product, charging $400 per year for ongoing, unbiased financial advice. There are also so-called robo-advisors, or online firms that will manage a portfolio of index funds for 0.50% per year, plus the cost of the underlying index funds. The combined cost of ongoing fee-only advice and a robo-advisor-managed portfolio of index funds would come in at under $600 per year for a $25,000 account, and that fee would grow much more slowly as assets grow because the $400 advice fee is fixed.
With alternatives like this there is no place for the DSC.
As much as PWL advocates for investors, we have been one of the largest beneficiaries of an industry that refuses to change. People are actively seeking out low-cost portfolios and financial advice that is not tied to commissions. There are still over $840 billion Canadian dollars invested in commission-based mutual funds in Canada.
If Advocis wishes to praise the continued practice of the DSC, effectively lobbying against the interests of the clients that they themselves serve, firms like PWL Capital will continue to reap the benefits.