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Don't unbundle investment advice fees from investment products: report

OTTAWA – Small investors stand to lose if securities regulators move to unbundle the cost for financial advisers from the investment products they sell, a new report says.

Canadian securities regulators have been exploring the idea of ending embedded compensation or trailer commissions where financial advisers receive a portion of a mutual fund’s fee as long as a client holds the fund.

However, a report released Friday by the University of Calgary’s School of Public Policy, says countries that have unbundled the cost of advice from investments have seen fewer people seeking financial advice, especially those with small accounts.

And, report author Pierre Lortie said, the costs have gone up.

“Small investors, which tend not to be very financially sophisticated, basically do not want to pay up front for financial advice” and they make “sub-optimal” investment decisions and their savings habits suffer, he said.

Those concerned about trailer fees — which are paid after the investments are made, not up front — have pointed to conflicts of interest that arise when advisers are paid different commissions depending where their clients invest their money.

A report for the Canadian Securities Administrators found that funds that performed better attracted more money, but that funds with trailing fees attracted more money regardless of past performance.

However, Lortie said there are better ways to deal with the potential conflict of interest.

“Regulation should encourage choice. Canadian investors should have access to a wide range of competing products and financial intermediaries, regardless of whether advice is delivered using commission- or fee-based advice models,” he wrote.

Any reforms that discourage investors from seeking professional investment advice would be counterproductive for retirement saving, the report says.

“The test of what policy is right or wrong has to be which one, which type of policy, has the better likelihood of improving the ability of individual Canadians to accumulate wealth on their own,” he said.

Last month, as part of its draft statement of priorities for the 2016-17 fiscal year, the Ontario Securities Commission said it was “committed to achieving better alignment between the interests of investors and their advisers.”

The provincial regulator said it was working on what regulatory action is needed to address embedded commissions and other types of compensation arrangements as well as disclosure.

Investment fees, which can erode returns, have been a key issue for investors in recent years and have been a driver of a move by some toward exchange-traded funds, which typically have low fees.

Securities regulators have been working to help improve the disclosure of the fees charged by investment advisers.

Under changes starting July 15, investment brokers and dealers need to start reporting annually on what they were paid for the products and services they provide.

These will include such things a embedded trailer-fee commissions, redemption fees, sales commissions and administration fees.

Advisers will also need to provide an annual report that includes deposits and withdrawals as well as the change in value and the percentage returns for the most recent year and several other periods.