Advisory Career Trends

A Commission Ban Is Not the Answer

New Canadian academic research identifies a negative impact on wealth accumulation, economy

We’ll look across our borders from time to time to analyze trends in the financial services industry that may have implications for our markets here. Her, the topic of compensation is always front-of-mind for advisors.

TORONTO, ON–(Marketwired – April 04, 2016) – A new 38-page academic paper, issued April 1, A Major Setback For Retirement Savings: Changing How Financial Advisers Are Compensated Could Hurt Less-Than-Wealthy Investors Most  (link here), asserts that the banning of third-party embedded compensation on the sale of financial products would constitute “a massive set-back for individual wealth accumulation and, ultimately, for the economy.”

Advocis is pleased to see that new independent Canadian research from the University of Calgary’s School of Public Policy supports its long-standing message that banning commissions will restrict access to financial advice for those who need it most.

“Mr. Pierre Lortie’s research strongly aligns with the association’s call to raise the bar for financial advisors through higher education standards and the creation of a profession. It also emphasizes the importance of preserving choice in how investors pay for financial advice,” says Greg Pollock, president and CEO, Advocis. “We encourage regulators and policymakers to consider this study when making a decision that could unintentionally prevent thousands of Canadians from accessing the professional advice they need to prepare for retirement.”

The study notes that instead of banning commissions and creating an advice gap, a more effective solution to the problem of potential conflicts of interest is to enhance the proficiency and professionalism of financial advisers.

The paper recommends a stronger emphasis on standards, continuing education programs and other means to improve the competencies and proficiency of financial advisors and increase professionalism — a position Advocis has maintained for several years.

Excerpts from A Major Setback…

  • Summary
    If regulators were to simply outright prohibit Canadians with low and middle incomes from seeking financial advice, it would obviously constitute a massive setback for individual wealth accumulation and, ultimately, for the economy. In Canada, after all, the well-being of a large proportion of retirees relies heavily on their voluntary personal and private wealth accumulation, in part due to the shrinking proportion of Canadian employees covered by a defined-benefit pension plan. As it is, between a quarter and a third of households of all income levels not covered by a defined-benefit plan are not set up to retire comfortably.And yet, currently, regulators are entertaining a change to the financial services industry that will almost certainly have the net effect of keeping the vast majority of Canadians from accessing financial advice. It is not quite a ban, but given the effect it will have, it almost could be.The role of financial advice is pivotal in helping people prepare for retirement. Evidence shows that the average individual’s knowledge of basic financial products and concepts is quite limited.Research indicates that Canadian households using a financial adviser to assist in saving and investment matters and plan their retirement accumulated 1.58 times as much wealth as did non-advised households after four to six years; after 15 years, that had increased to 2.73 times. That has an effect on the rest society, too, since wealthier retirees enjoy a better quality of life, are less burdensome on government income supplements and contribute more to the economy.
  • Background: The alleged sins of commissions and regulatory responses 
    Financial advice is a huge matter. Canada’s retirement income system differs from that of most OECD countries in that, in Canada, the financial well-being of retirees relies much more on their individual and voluntary private and personal initiatives.This feature is accentuated by the structural changes brought to the Canadian retirement income system5 and the shift in the proportion of the labour force covered by defined benefit pension plans (DB plans) — which offer a guaranteed income stream in retirement — to defined contribution plans (DC plans) — which do not. In 2014, about 60 per cent of retirees received retirement income from a registered pension plan (RPP); significantly, only 38 per cent of employees were then enrolled in such a plan6 force was member of a DB plan (Figure 1).Of great significance is the fact that between 2000 and 2015, the proportion of private sector employees covered by a DB plan dropped from 22.4 per cent to 12.2 per cent. and less than 25 per cent of the labour The direct effect of these changes in the Canadian retirement income system is a wholesale transfer of investment performance, inflation, longevity and market risks to individuals.They are real. In 2012, the difference in average wealth — defined as the total value of assets minus the total value of debt — among Canadian families with the same socioeconomic characteristics between those with and without RPP assets amounted to $177,000 ($536,000 versus $359,000).7 labour force who are not members of a DB plan, accumulating enough wealth for a secure retirement is a tall order. According to a recent extensive survey, 25 per cent of Canadian households covered by a DC plan or group RRSP and 37 per cent of mid- to high-income households with no RPP will most likely have insufficient income to live comfortably in retirement.8
Mr. Pierre Lortie's research strongly aligns with the association's call to raise the bar for financial advisors through higher education standards and the creation of a profession

Read the entire report:
A Major Setback for Retirement Savings: Changing how Financial Advisers are Compensated could Hurt Less-Than-Wealthy Investors Most (link here)




About Advocis
Advocis, The Financial Advisors Association of Canada, is the association of choice for financial advisors and planners. With more than 11,000 members in 40 chapters across the country, Advocis is the definitive voice of the profession, advocating for professionalism and consumer protection. Advocis works with decision-makers and the public, stressing the value of financial advice and working toward an environment in which all Canadians have access to the advice they need. Follow us on Twitter @advocis or visit