The newly minted obligation to disclose mutual fund fees will probably spread to segregated funds. If the regulators also ban embedded commissions and MGAs are forced to implement fee-based compensation only, it may cost them $200 million, a recent study finds.

The consultation by the Canadian Securities Administrators (CSA) on the possibility of eliminating embedded commissions in mutual funds is troubling MGAs. They worry that this ban will spread to segregated funds, just as disclosure has.

Disclosure of segregated fund commissions would affect MGAs’ economic model because of their structure. This finding was stated in an Insurance Advisory Service report on MGAs published in August 2016, produced by Strategic Insight.

An excerpt of this report obtained by The Insurance and Investment Journal states that the segregated fund compensation model will continue to be largely skewed towards deferred sales charges (DSC). This compensation structure accounted for 40% of gross seg fund sales in 2015, compared to 20% for mutual funds during the same period. The smaller proportion of DSC for mutual funds is due to the fact that CRM2 disclosure requirements already apply to them.

“Based on MGA gross sales and the estimated DSC share in 2015, DSC point-of-sale commissions alone had an annual economic impact on MGAs and their advisors of approximately $200 million,” the report confirms. Strategic Insight thinks that DSC will have a greater on impact MGAs than on mutual fund dealers.

Hub Financial President Terri Botosan is optimistic despite these regulatory issues. “It’s a very exciting time for the MGAs: we must participate in discussion with the regulators, and make sure that every party considering these decisions understands what that might mean for the customers,” she says.

We know that disclosure is imminent for segregated funds, James McMahon, president of Financial Horizons Group – Quebec. “Regulatory changes are accelerating in the industry, and we have to spin on a dime, which is getting more and more expensive. We have a back-office system for mutual funds and segregated funds, with a staff of over 50 people. If the advisors all go to fee-based compensation tomorrow morning, it would take me four to five years to absorb the shock,” he says.

The Canadian Association of Independent Life Brokerage Agencies (CAILBA) and the insurance industry overall have clearly expressed their support for embedded commissions in segregated funds to the Canadian Council of Insurance Regulators (CCIR), says Michael Williams a BridgeForce Financial Group (BFG) partner who is also president of CAILBA. “Agents are not afraid of disclosing and stating at the point of sale with the client that they have a choice as to how they pay for advice. I hope the regulators heard the message. Even if mutual funds embedded commissions are banned, we believe we can still support embedded commissions on seg funds with success,” he adds.

Six of one…

James McMahon thinks that by banning commissions, regulators will create a bigger problem than the one they wanted to solve. “Take a couple who saves $25 or $50 per month and over the years manages to accumulate substantial assets. Who will take care of them, who will help them? The regulators haven’t answered that question yet!” 

Michel Kirouac, vice-president and general manager of Groupe Cloutier, does not understand why the CSA is leaning toward one model rather than another. He views them as equivalent. “I don’t really see a difference between charging the customer fees and selling funds with embedded commissions. In the industry, 90% of funds foresee compensation for the advisor of about 1%,” he explains.

Compensation still hovers around this mark, Kirouac adds. A fund with embedded commissions whose management expense ratio (MER) is 3% will pay the advisor a trailing commission of 1%. The rest will go to the manufacturer. If this fund exists in an F series, the MER will be 2% and the advisor can adjust his or her trailing commission. “For example, we see an average trailing commission of 0.6% to 1% in F series funds,” Kirouac says.

In the fee-based model, customers pay the manufacturer fees of 2%, and the advisor negotiates the fees directly with the customer. “This is the model that the regulators are heading toward. If the fee-based model is imposed, this may affect the value of investment fund blocks of business,” Kirouac points out.

Michel Kirouac is not a fervent believer in the single fee-based model. “100% transparency is a fine principle, but what will the banks put on their statements? This reform will confuse people for nothing, in addition to affecting advisors who manage large asset volumes. We are not against disclosure, and it’s already required by law. But eliminating trailing commissions would be quite a shock, and we would have to learn to live with it,” Kirouac adds.

Groupe Cloutier is poised to submit a brief as part of the CSA consultation on the possibility of banning embedded commissions in mutual funds.


For more on this issue, please see Advisor groups fight potential ban on embedded commissions.