A senior investor confronts securities watchdogs about potential conflicts in embedded compensation
In a recent submission to the CSA’s consultation paper on discontinuing embedded commissions, a senior investor expressed frustration over regulators’ failure to answer questions he asked about the model.
“I contacted the CSA with five questions related to the disposition of embedded commissions under certain changing ‘advisor’ to investor relations,” said an 83-year-old investor Peter Whitehouse in a seven-page letter emailed to the association. “I received a response that I should click on a provided link to the OSC and rummage through 74 Rules, Instruments & Policies papers that should be related to my quest.”
Prior to contacting the CSA, Whitehouse reached out to the OSC to ask the same questions. The OSC did not answer them, but did say that embedded commissions are sent from the mutual fund company to the investment dealer, who then distributes the commissions among its advisors based on a pre-arranged agreement.
The questions Whitehouse asked the regulators were:
In his letter, he asserted advisors – dealing representatives – should not be given sales commissions by the fund companies they recommend, calling it a “pure conflict of interest” that exposes investors, particularly seniors, to various abuses.
He also spoke out against advisors who sell investors mutual funds on a deferred sales charge (DSC) basis without disclosing that they’d immediately receive a 5.5%-6% sales commission. According to Whitehouse, there’s no requirement for advisors to inform investors of the high sales commission rate prior to the transaction, or of the detrimental impact related to DSC-based fund purchases.
He further urged the CSA to disallow bank-owned dealers’ practice of sending complainants to an “internal ombudsman.” Since there is no regulatory disciplinary oversight of such bodies, he contended, it exposes wronged investors to low-ball restitution recommendations and rejection of valid claims based on false and misleading reasons.
“If a dealer rejects a claim, they should be directed to OBSI and never to the unregulated entity of the bank ‘internal Ombudsman,’ as so many bank brochures do,” said Whitehouse.
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Advisor group slams OSC priorities
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“I contacted the CSA with five questions related to the disposition of embedded commissions under certain changing ‘advisor’ to investor relations,” said an 83-year-old investor Peter Whitehouse in a seven-page letter emailed to the association. “I received a response that I should click on a provided link to the OSC and rummage through 74 Rules, Instruments & Policies papers that should be related to my quest.”
Prior to contacting the CSA, Whitehouse reached out to the OSC to ask the same questions. The OSC did not answer them, but did say that embedded commissions are sent from the mutual fund company to the investment dealer, who then distributes the commissions among its advisors based on a pre-arranged agreement.
The questions Whitehouse asked the regulators were:
- What happens to the continuation of the embedded commission payouts when an investor terminates their relationship with their financial advisor? Who gets the future embedded commission payouts?
- What happens to the continuation of the embedded commission payouts when a financial advisor employed by Investment Dealer "A" resigns from an investor's account?
- What happens to the continuation of the embedded commissions payouts when the investor's financial advisor employed by investment dealer "A" sells the investor's account (selling the book) to another financial advisor employed with the same investment dealer "A"?
- What happens to the continuation of the embedded commissions payouts when the investment dealer resigns from the investor’s account?
- What happens to the continuation of the embedded commission payouts when an investor terminates their relationship with a financial advisor employed by investment dealer "A" and the investor transfers their account to investment dealer "B"?
In his letter, he asserted advisors – dealing representatives – should not be given sales commissions by the fund companies they recommend, calling it a “pure conflict of interest” that exposes investors, particularly seniors, to various abuses.
He also spoke out against advisors who sell investors mutual funds on a deferred sales charge (DSC) basis without disclosing that they’d immediately receive a 5.5%-6% sales commission. According to Whitehouse, there’s no requirement for advisors to inform investors of the high sales commission rate prior to the transaction, or of the detrimental impact related to DSC-based fund purchases.
He further urged the CSA to disallow bank-owned dealers’ practice of sending complainants to an “internal ombudsman.” Since there is no regulatory disciplinary oversight of such bodies, he contended, it exposes wronged investors to low-ball restitution recommendations and rejection of valid claims based on false and misleading reasons.
“If a dealer rejects a claim, they should be directed to OBSI and never to the unregulated entity of the bank ‘internal Ombudsman,’ as so many bank brochures do,” said Whitehouse.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Advisor group slams OSC priorities
CSA chair speaks out on best-interest standard
