But Bureaud argues that compared to DSCs, advisor chargeback commission structures are much worse for Canadian consumers.
Chargeback schemes create direct conflicts of interest
Under the DSC model, an investor or consumer puts money in a fund with the help of an advisor, who gives them advice related to the benefits and performance of the product. If they decide to redeem their interest from the fund before a specific amount of time specified under the DSC schedule, they’ll have to pay an early redemption fee. That structure, critics say, is ripe for abuse by advisors who disregard their clients’ needs for liquidity when recommending DSC funds.
The industry has attempted to address that conflict through advisor chargebacks, which charge the cost of early redemptions to the recommending advisor. Not only do they ease the financial pain for clients, the reasoning goes, but they also create an incentive for advisors to not push segregated funds on clients who may need access to their funds before the official redemption schedule elapses.
But as Bureaud explains, chargeback schemes put clients’ and advisors’ interests in direct opposition during an early redemption scenario.
“As the advisor, I don’t want my client to redeem because I’m going to be out of pocket,” he says. “Just as much as investors don’t like to pay commission fees up front, advisors don’t like to have to pay back commissions later on. So, their interests are in a direct conflict when the client wants to sell. In these situations, it would not be unreasonable to expect an advisor to try to convince the client to keep their money in the seg fund, and, if they need to liquidate some holdings, persuade them to consider selling another investment.”