Similar to mutual funds, DSCs in seg funds can also be useful for newer advisors to get a decent amount of compensation as they build up their expertise. While that might not be as much of a concern for salaried greenhorns, the story is very different for those trying to build up their own business from scratch in the independent space.
“There are some cases where advisors may feel the DSC option will not end up hurting their client,” Gandhi adds. “If the DSC segregated fund is in a locked-in account like a LIRA, the client is typically not going to redeem the funds for the foreseeable future until they reach a particular age. If they’re a long time away from that age, then potentially the DSCs might not seem harmful for them.”
An irreparable conflict?
For some stakeholders, a ban on DSC seg funds couldn’t come soon enough. In its comment letter, FAIR Canada recommended that DSCs in segregated funds be implemented as soon as possible.
“Research on commission structures demonstrates that DSCs distort the advice process and skew advice towards products that pay these fees, as opposed to products that best serve consumers,” it said.
The Canadian Advocacy Council of CFA Societies Canada (CAC) took the same view, arguing that the DSC option incentivizes insurance representatives to sell products and offer advice that maximize their compensation, rather than what’s best for the consumer. In its own comments, the Financial Planning Association of Canada (FPAC) took the view that no compensation structure should incentivize the sale of one investment product over another.