The move toward a ban on commission fees embedded within mutual funds is still not a certainty, despite a growing movement to eliminate them.
Groups such as the Canadian Foundation for Advancement of Investor Rights (FAIR) and the Ontario Securities Commission’s Investor Advisory Panel are calling for the outright ban of what’s known as trailing fees or trailing commissions. This is the industry-wide practice in which mutual fund companies pay investment advisers to get their clients to invest in a mutual fund.
Investor rights groups see this as an inherent conflict of interest.
Securities commissions are now phasing in requirements that would make fund companies disclose more fully a fund’s fees and performance. But rights groups say this doesn’t go far enough, and that the whole system of embedded commissions isn’t in the interest of private investors.
The fees are also simply too high, said Ken Kivenko, chairman of the Small Investor Protection Association. “There is no way people will have retirements. I don’t think they’ll be able to survive with the fee structure the way it is. It’s just not working.”
He believes the new transparency requirements are a step in the right direction, but it highlights the fiduciary duties, or trust, advisers are supposed to exhibit toward their clients.
“Once you do that, it is incongruent with embedded commissions. In fact, it’s incongruent with sales commissions altogether once you are a fiduciary, since you must act only in the best interest of the client. That’s the real battle,” he said.
More than 12 million Canadians own mutual funds, and Canada’s mutual fees are among the highest in the world, according to FAIR Canada.
One argument heard on Bay Street is that the current system helps to create a stable relationship among private investors, advisers and mutual fund companies. If investors were to start changing their holdings aggressively based on lowering their fees, so the argument goes, that might prevent investors from sticking to a safer, buy-and-hold investment strategy.
Investor rights groups disagree. They say new requirements, being phased in over three years, provide more transparency on a fund’s costs and that performance is crucial.
“I think it’s a step in the right direction. I think consumers should know what costs and fees they are paying,” said Marian Passmore, director of policy and chief operation officer of FAIR Canada.
In particular, investors will be able to figure out the total dollar amount of the commissions they pay in their portfolio. But she argued that the trailing commission of individual funds won’t be clear enough for everyday investors. Ultimately the embedded fees should be removed, she said.
“Right now, the funds are competing to get the shelf space and to get advisers to recommend their fund, and that’s based on paying the adviser more. That is a misalignment of what’s in the interest of the consumer versus the adviser,” Ms. Passmore said. “The fact that there will be transparency isn’t going to change how that competition and how the distribution system [of mutual funds] work.”
The OSC’s investor advisory panel has argued the same. “We are saying that we think the commission should move quickly, because Canadians are relying on this for their investment retirement security,” said Connie Craddock, the panel’s chair.
The Canadian Securities Administrators is still in the process of looking at options. These include possibilities such as allowing a new do-it-yourself class of funds with lower fees, or perhaps more clearly regulating what baseline services advisers have to perform to get their fees. Eliminating embedded fees altogether is only one option.
Changes have already taken place in other countries. Ms. Craddock noted recent rule changes in Britain and Australia: “The U.K. and Australia are very similar economies, very similar common law, very similar securities regulation. And there is a reason why regulators there decided what they need to do, and largely motivated by retirement security issues.”
With more and more people relying on their own investments for retirement, the fee structure is becoming more of a public-policy issue, Ms. Craddock said. “If that’s the way it’s supposed to be, then you better level the playing field and make it fair and [make investment advice] unbiased.”