Grey Matters: Halting hidden adviser fees once and for all


In the world of advocacy, those who seek incremental gains often clash with those fighting for big wins. Small steps add up over time, one side says. You can’t baby-step across a chasm, says the other.

To improve air quality, do you seek better gas mileage, or an outright ban on gas-powered vehicles?

To reduce income inequality, do you fight for targeted social programs, or a guaranteed minimum income?

This tension is not new. When Abraham Lincoln sought to free America’s slaves in the mid-1800s, others wanted instead to improve their living conditions.

I was reminded of this perennial tension when the Canadian Securities Association (CSA) consulted on banning embedded fees earlier this year, then, in the face of industry opposition, began consulting on alternatives to an outright ban.

An embedded or hidden fee is a commission paid by a mutual fund company directly to a client’s adviser. The client pays an annual fee to the fund company, usually between two per cent and 2.5 per cent of assets invested; the fund company pays a commission to the adviser, generally between 0.5 per cent and 1.5 per cent a year, as long as the client owns the fund.

Advisers can earn additional hidden commissions if they sell their clients funds that are locked in (the client must hold a fund from that fund company for a period of years or pay a significant penalty), or front-loaded, where a client pays a percentage of assets off the top to join the fund.

A CSA paper released in January, called Consultation on the Option of Discontinuing Embedded Commissions, notes three fundamental problems with hidden commissions:

• Hidden commissions create conflicts of interest for advisers;

• Investors’ understanding and ability to control hidden commissions are limited;

• There is no relationship between hidden commissions paid and services provided.

Through independent analysis of information from the fund companies themselves, the paper confirmed the harm to investors and to the market itself.

In light of this, you might wonder why the CSA hasn’t already banned these commissions. Indeed, Canada is lagging behind a global reform movement — the U.K., Australia and the Netherlands have all banned hidden commissions.

The CSA’s initial consultation on a potential ban on embedded commissions received more than 140 responses. CARP’s response noted that 79 per cent of our members favour a ban on hidden commissions. Investor advocates, industry innovators and a few courageous advisers supported a full ban on hidden commissions; industry groups objected.

The CSA failed to take decisive action. Instead, they opted for more consultation, this time in person, to consider alternatives to an outright ban on embedded commissions.

I recently attended one of these consultations in Vancouver. The discussion focused on whether investors could be protected by alternate measures such as:

• Banning only the hidden commissions that lead to the most flagrant conflicts of interest — that of paying an adviser to lock in their client’s investment dollars;

• Capping or standardizing hidden commissions

• Giving clients more information about their hidden commissions.

While at the session, I was reminded of a lecture I once attended on parenting, where a counsellor noted, “We want to discipline our children — and we want them to like it. Instead, we need to be strong enough to act in our children’s best interests, even in the face of their opposition.”

The CSA’s original consultation paper on discontinuing hidden commissions included clear and compelling evidence for a ban. It should surprise no one that those who benefit from an exploitative business model oppose changing it. The CSA and its member securities associations must be strong enough to act in the best interests of investors, even in the face of such opposition.

Whether slavery in Lincoln’s time or hidden commissions today, a practice that is fundamentally harmful cannot be reformed. Half measures will not do. It’s time for a full ban on hidden commissions.

If you support better protections for investors, sign CARP’s petition at


Grey Matters is a weekly column by Wanda Morris, the VP of Advocacy for CARP, a 300,000 member national, non-partisan, non-profit organization that advocates for financial security, improved health-care for Canadians as we age. Missed a week? Past columns by Wanda and other key CARP contributors can be found at