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Abolition of the commissions built-in : IFIC feared the worst for small investors

by

Hubert Roy

15 August 2017 07:00

Paul C. Bourque

According to the investment funds Institute of Canada (IFIC), are the small investors who will suffer from the abolition of the commissions built in. Throughout the month of June, the IFIC has multiplied the positions advocating for their maintenance.

The main argument that has carried on the IFIC is that 79 % of canadian households holding investments of small investors, with assets of less than $ 100,000. The Institute takes this data from Strategic Insight (formerly called Investor Economics), which, in 2015, has published statistics on the investments held by Canadians in 2014.

The IFIC also argues that these are 7.9 million canadian households who hold investments through the members of theAssociation of canadian mutual fund dealers (MFDA). The Institute also believes that these smaller investors were unlikely to have an amount of less than $ 25,000 when they have started to invest. And the IFIC concludes by noting that 8 small investors in 10 have purchased units of mutual funds by the intermediary of a representative, citing a study by the firm Pollara conducted in 2016 for the account of the IFIC on these last two points.

«Canadians hold a higher percentage of investment funds relative to total financial assets than any other country in theOECD. The ban on commissions as part of reducing access to investment advice to households in the mass market have less money to invest. This unintended consequence will have a significant impact long term on the capacity of Canadians to plan and save for their retirement, » said Paul C. Bourque, president and ceo of the IFIC.

The IFIC advance several figures to support the thesis of Mr. Bourque. First of all, citing a study by CIRANO realized in 2016, the Institute stresses that investors who rely on representatives in financial services are seeing their savings grow 2.9 times faster after 7 years than those who do it by themselves. This proportion increases to 3.9-fold after 15 years.

IFIC then cites a study from PricewaterhouseCoopers (PwC) has calculated the consequences for the Canadian private advice in the event of the abolition of the commissions built in. PwC comes to the conclusion that the Canadian non-advised accumulate on average 240 000 $ before retirement than if they had access to investment advice.

Negative Impacts in the long term

During a speech to theEconomic Club of Canada, June 15, in Toronto, Mr. Bourque has once again cited the study of PwC. He has argued that banning commissions ingested would have negative impacts in the long-term effect on the ability of Canadians to save. «Investors will be less inclined to resort to the advice of a professional if they must pay from the outset of the game. They will have a much lower level of assets to fund their retirement, » he said.

Before his speech, Mr. Bourque had requested the regulatory authorities to weigh carefully the pros and cons in their decision to come. «According to the PwC, there is no convincing evidence that the models of remuneration by fees paid directly to give better results than models with commissions built in. Before going forward, the regulatory authorities must have a clear understanding of the effect of a ban of commissions as part of the millions of investors holding units of mutual funds and on the access of canadian investors in the mass market for financial advice. «

Station to conclusions too quickly

He also cautions canadian regulators to draw hasty conclusions from what is done elsewhere in the world. He gives the example of the framework of mifid II, currently under study in Europe, which proposes to prohibit the representatives in financial services are independent to accept commissions.

«The financial services self-employed are one of the smallest channels in the fund industry in europe. They only account for 11 % of assets. The banks are responsible for the vast majority of fund sales in the countries where this practice is not forbidden, » said Mr. Bourque.

The IFIC also puts forward the example of the United Kingdom, which has abolished the commissions built in. Two years after having abolished the commissions, the uk Treasury and the Financial Conduct Authority have launched a consultation, entitled Financial Advice Market Review. This consultation revealed that the quality of financial advice had improved markedly, but they were less accessible so that only the wealthy can access and pay to get these tips.

«The regulatory agencies of the United Kingdom acknowledged that the reforms implemented in this country, including the banning of commissions integrated, have created gaps in the provision of advice to small investors. The firms have raised the minimum balance required in the accounts, and the number of openings of new accounts for retail investors (30 000 £ 100 000 £) has fallen. The government now puts in place a number of mitigation measures, including permission for investors to withdraw up to 1 000 £ to their pension fund without consequence tax in order to pay for financial advice «, says the IFIC.

The question of the fiduciary duty

In its pronouncements, the IFIC has also addressed the question of the fiduciary duty, which obliges them to prioritize first the interests of the client. The Institute argues that only Australia has adopted a standard regarding the duty of legal representatives to act in the best interests of the client in the sale of collective investment schemes to individuals.

In the United States, the U. S. Department of Labor adopted a regulation that expands the definition of «fiduciary» under the act on the retirement income security of employees (Employee Retirement Income Security Act). Under the latter, the investment representatives, including securities brokers and insurance agents, who provide advice in connection with retirement accounts must adhere to certain fiduciary standards, refer to the IFIC.

In front of the Economic Club of Canada, Mr. Bourque has dealt with the discussions surrounding the fiduciary duty in Canada. «We are in agreement with the regulators when they say that you should prioritize the investor’s interests before those of the firm or the adviser when these interests may present a conflict. We are also in agreement with the regulators of the four provinces that have decided not to go to the front to give a standard about this, pointing out that it was not clear that this standard would improve the rules that advisers must already follow. «The Quebec, British Columbia, Alberta and Manitoba are the four provinces to be separated from this standard. For Mr. Bourque, regulators need to consider the options which will preserve the access to the board that the investors want to have at a price they can afford. «The options that did not meet this criterion should be considered only if they have a major benefit for the public. «

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