The Investment Funds Institute of Canada (IFIC) suggests that some of the rules which govern advisor compensation in other countries may be unnecessary in Canada.
In the most recent issue of its Advisor Insights bulletin, IFIC has summarized various approaches to financial services regulation in other countries and provided reasons why they may not be appropriate for Canada.
Banning embedded fees
For example, IFIC notes that the United Kingdom, Australia, and the Netherlands all banned embedded fees in direct response to mis-selling and corporate corruption scandals. "Canada has not experienced any such market failures," notes IFIC.
What's more, foreign jurisdictions lack the kind of dedicated market conduct oversight agencies that we have such as the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association; IFIC suggests that this was an important contributing factor to the mis-selling and corruption that triggered a ban against embedded fees in other countries.
When the UK banned commissions, IFIC says the result was ultimately counterproductive in some cases because it resulted in higher costs. The bulletin points out that the interim chair of the British Financial Consumer Agency has acknowledged that the ban has made it difficult for smaller investors to obtain advice.
Unlike other jurisdictions, IFIC argues that investors in Canada are able to choose from a wide range of distribution and compensation models. "The most common model – embedded fees – delivers access to advice for investors of all levels, including those just beginning to save and those with limited amounts to invest," says IFIC.