From a personal exploration, I came to the understanding of a phrase, 'See things for what they are, not for what you wish to be'. As a result of the Federal government examining financial advisor compensation and embedded commissions, Advocis, the oldest and largest voluntary professional membership organization of financial advisors and planners in Canada, is pushing forward with a Profession Model in response and it is a noble one. They believe and I agree that consumers should be able to count on professionalism and accountability from their advisors. What I do not agree with is when they proclaim that if commissions were banned, that Canadians, especially lower income Canadians, would not be able to access financial advice to the same extent they do now.
From the Advocis discussion paper titled, "CSA DISCUSSION PAPER AND REQUEST FOR COMMENT 81-407 MUTUAL FUND FEES" dated April 12, 2013, they contend that:
Embedded compensation makes the benefits of mutual fund investing available to consumers who have small amounts to invest, who would likely not be willing or able to establish fee-based accounts and pay separately for advice.
The majority of wealth in this country is held within the confines of the banks while most individuals get their financial advice either from their group benefits provider or their local bank teller. The reality is professionals need to make a living, they have to do a cost benefit analysis for the work they do; is it worth their time and as such they find it hard to do work for no compensation, this isn't new. Professionals are mostly focused on Banks working with individuals who are serious about putting forth effort and working as a team rather than giving advice where it is never implemented.
If the banks really cared about Canadians and the individuals they served, every disabled person under the age of 59 in Canada would have a Registered Disability Savings Plan (RDSP) and every family with a child under the age of 15 would have a Registered Education Savings Plan (RESP). But they don't. Why not? These two products tend to be complicated, there is extra work required to set them up and the deposits and hence money made from these accounts can be small. From what I have seen, RESP's end up being an add on to an existing portfolio, and very few people have taken the time to fully understand RDSP's.
If you are disabled, have a social insurance number, reside in Canada and are under the age of 59, you qualify for a RDSP. A full explanation can be found on Canada Revenues website but to highlight that financial institutions don't necessarily care about all Canadians. If you are disabled and make less than $25,000 you qualify for an annual extra benefit from the government of $1000 regardless, whether you make any contributions or not. So simply by opening an account, the government will give you $1000 a year for up to 20 years. Free money on the table that few people know about. Why? Because it is not in the bank's interest to talk about something that would cost them more in time than in profit.
Looking at RESP's, if you have a child, Human Resources and Skills Development Canada (HRSDC) provides free money to help modest-income families start saving early for their child's education after high school. It is referred to as the Canada Learning Bond (CLB).
Like the RDSP, if your family income is less than $25000 you are entitled to the National Child Benefit (NCB) supplement for your child. As a result, in addition to the NCB, the CLB will provide an initial $500 for every child born on or after January 1, 2004, while HRSDC will pay an extra $25 with the first $500 bond. Thereafter, the CLB will also pay an additional $100 annually for up to 15 years for each year the family is entitled to the NCB supplement for the child. Granted $2000 will not go a long way in the spectrum of post secondary education, but something is better than nothing and if the government is willing to give away money for free, why isn't every financial institution out there speaking to every Canadian about these programs?
The answer is that there is no money to be made working with families or individuals with small accounts. It is important to listen to the arguments about why commissions should remain in the financial services industry, but at the same time be skeptical and see things for what they are, not for what someone else wishes you to see.
Kevin Cahill
