Canadians’ investment decisions may be affected by financial advisors’ reliance on trailing commissions

In Morningstar’s 2015 Global Fund Investor Experience Study, published in June, Canada scored a C+ based on four categories: Regulation and Taxation (C), Disclosure (A-), Fees and Expenses (D-), and Sales and Media (B). As usual, the category that stands out is Fees and Expenses. The average equity fund in Canada has a fee of 2.35%, while the average balanced fund has a fee of 2.16%. One of the most interesting parts of this study is the breakdown of fee-based vs. commission-based funds in Canada. Knowing that the majority of Canadian investment fund assets are in mutual funds, and the majority of mutual assets are commission-based, it begs the question of whether or not investment recommendations are affected by commissions. Low-cost investment products such as index mutual funds and ETFs do not pay deferred sales charge or trailing commissions.

Mutual funds can be obtained by investors in three forms: commission-based, fee-based, and direct.

A commission-based fund has a commission for the advisor selling it built into the MER; the net effect is that the fund company rather than the client is paying the advisor. These funds must have higher fees in order for them to pay the advisor, and cover the operating costs of the fund. If an advisor operates on a commission basis, they are likely to use funds that pay commission. A fee-based fund does not pay any commissions; the MER only covers the costs of the fund, and the advisor is left to negotiate a separate fee with the client. Direct funds are purchased without going through an advisor at all.

With such a large proportion of Canadian mutual fund assets in commission-based funds, it is hard to believe that commissions are not playing a role in investment recommendations.

		PERCENTAGE OF ASSETS
Fund Type	Commission-Based	Fee-Based	Direct
Domestic Core Balanced – Aggressive	95.6	4.1	0.3
Domestic Core Balanced – Moderate	93.5	4.1	2.4
Domestic Core Balanced – Conservative	96.5	3.2	0.3
Domestic Core Bonds	82.5	9.1	8.4
Domestic Core Equity	90.9	4.4	4.7
Domestic Money Market	90.3	2.4	7.3
Domestic Non-Core Bonds	86.1	11.3	2.6
Domestic Non-Core Equity	84.6	9.4	6.0
Foreign Core Equity	79.6	13.2	7.3
Foreign Money Market	96.4	0.3	3.3
Foreign Non-Core Equity	84.2	13.0	2.8
Global Core Balanced – Aggressive	96.2	2.7	1.1
Global Core Balanced – Moderate	95.8	3.5	0.8
Global Core Balanced – Conservative	94.1	5.8	0.1
Global Core Bonds	58.1	41.2	0.7
Global Core Equity	88.8	10.1	1.1
Global Non-Core Balanced	93.8	4.6	1.5
Global Non-Core Bonds	74.7	20.5	4.8
Global Non-Core Equity	83.7	12.2	4.1
Sector Equity	88.8	9.7	1.5

Source: Morningstar Global Investor Experience Study

Benjamin Felix
Portfolio Manager, Head of Research, MBA, CFA, CFP, CIM

Benjamin Felix is the Head of Research at PWL Capital, a Canadian wealth management firm known for its publicly available thought leadership. PWL creates resources for Canadian investors including white papers, model portfolios, and research content. Benjamin co-hosts a podcast, the Rational Reminder, and is the host of a YouTube channel which together reach hundreds of thousands of people in Canada and around the world. Benjamin joined PWL Capital in 2013 after completing a degree in mechanical engineering and an MBA in financial management. He is a CFA charterholder and a CFP professional.

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