The CSA’s proposed ban on embedded commissions

Firm News

The Canadian Securities Administrators have recently proposed a ban on embedded commissions. In the, Bernard Pinsky is featured discussing the ban and its implications for brokerage firms.

The article explains that moving ahead with the proposal could create challenges for advisors and some of their retail clients.

“People tend to not recognize the value of advice, and, therefore, they will not want to pay upfront fees,” which could potentially force investors away from mutual funds into riskier securities, says Bernard. Further, if robo-advisors take up the slack, he questions if Canadian retail investors, who may know little about financial products, can effectively use the services of robo-advisors.

Although the proposal suggests a ban would result in the promotion of lower-cost, passive products, Bernard explains that a potential negative is that the ban could promote churning of stocks as brokers become dependent on commissions from sales and repurchases, because they could no longer rely on trailer fees.

The article explains that the proposal recognizes the potential for reverse churning: brokers collect upfront fees and do little else for clients.

Bernard expects even greater consolidation as the industry goes fee-based. “Lots of advisors and dealers […] are not going to be able to compete” if a total ban of embedded commissions comes into effect.

Read the full article to learn more.