You may have heard the term embedded commission in the news recently. Following the release of CSA Notice 81-330, embedded commissions have been the talk of business and investing news programs and online, through news sites, social media and investment forums. The discussions and talks are helpful because it makes sure investors are informed about what is happening in the industry. The only problem is that a lot of investors do not know what embedded commissions mean.
Embedded commissions are also referred to as trailing commissions or trailer fees. They’re related to mutual funds and are a commission paid to an adviser or salesperson by the mutual fund company that sold the fund.
The commission is paid while you own units in the fund. They generally run from 0.25-1 per cent and are built into (or embedded) into the fund’s management expense ratio (MER).
Since embedded commissions are embedded in a mutual fund’s MER, these amounts will not appear on your client statement. Embedded commissions reduce your investment return when the payment is made by the fund and not the mutual fund company. You should ask your adviser what additional fees you are paying and how it impacts your investment return.
Opponents to embedded commissions point out that advisors can potentially be paid more by recommending funds that have higher commissions which creates a conflict of interest. To combat this conflict of interest and make sure advisers always have the client’s interest up front, the CSA has enacted suitability requirements for all investment recommendations based around Know Your Client and Know Your Product regulations.