Six years ago, Canada’s securities regulators stunned Bay Street by launching a review of mutual fund fees. Justifying the probe, they cited research showing these fees are “among the highest in the world” and noted that many advisers do not tell their clients about these costs.
In late June, after multiple rounds of consultations, the watchdogs finally released their recommendations. They landed with a splat.
After so many years of study, the only major proposal was a ban on deferred sales changes. Trailer fees − controversial, annual charges paid by investors to financial advisers, for simply investing in mutual funds − live on.
The verdict is a blow to investors. These annual fees often consume 1 per cent of assets invested in a fund, and they serve as a steep tax on them.
Although the study now feels complete, it shouldn’t be the end. There are still other avenues for regulators to pursue. At the top of that list: the increasing concentration of power in wealth management among the Big Six banks.
Historically, Canada’s banks were second-rate players in this corner of the financial-services industry. Wealth management used to be dominated by non-bank fund managers such as AGF Management and Mackenzie Financial and independent brokerages such as Nesbitt Burns and Wood Gundy.
Methodically, the banks bought and built their way into a dominant position over a few decades, first by scooping up full-service adviser networks in the 1980s and 90s, then by turning their attention to asset managers such as Phillips Hager & North (acquired by Royal Bank of Canada in 2008) and DundeeWealth (bought by Bank of Nova Scotia in 2011). Toronto-Dominion Bank’s plans to purchase Regina-based Greystone Managed Investments Inc. for $792-million in cash and stock is a continuation of that trend.
The Big Six now account for almost half of long-term mutual fund assets − a proportion that continues to grow − as well as 53 per cent of net mutual fund sales so far this year, according to Strategic Insight, a consultancy that studies the asset management industry.
Has the banks’ newfound power and scale resulted in a better deal for investors? Hardly. The Globe and Mail recently studied the 100 largest mutual funds in Canada, a list dominated by the banks, and found their fees have barely dropped over the past five years. The average decline in management expense ratios (MERs) for the 100 largest funds was just 0.05 of a percentage point, and the average MER is still 1.99 per cent.
About half of those funds are managed by banks. At the top of the list were two RBC fund portfolios that, incredibly, held a combined $55-billion in assets as of Dec. 31. As these megafunds have grown, their expense ratios have not dropped at all, The Globe’s examination found.
A few independents, such as CI Financial Corp., maintain the heft, sales force and name recognition to compete with the big banks in asset management. But over all, independent firms’ ability to provide honest competition is weaker than it was, which makes it harder for startups with lower fees, such as Wealthsimple, or sometimes even global giants with low-cost funds to attract investors dollars.
The banks have such size that they can use their massive networks of bank branches and financial advisers to promote their own funds – and squeeze out rivals in the process.
“Being an independent in investment management isn’t easy,” said John Ewing, chief investment officer at Ewing Morris & Co, an independent asset manager. “The Canadian banks have a lot of different ways to influence investors.”
Sometimes, they take it too far. When asked about the issue of banks selling their own proprietary funds in 2013, Dave Agnew, head of Canadian wealth management at RBC, told The Globe: “We do not force any product, whether it’s in-house or not … to the clients within our wealth businesses in Canada.” This claim now has an asterisk on it. In June, the Ontario Securities Commission fined RBC $1.1-million for paying some of its advisers a better commission to sell the bank’s own funds between 2011 and 2016.
RBC says Mr. Agnew’s comment was not misleading. Non-RBC funds are still sold within the bank’s system. But while the bank may not “force” a fund on its customers, it was caught offering some employees 10 basis points more in commissions to sell in-house funds. Over five years, the OSC found the enhanced compensation added up to $24.5-million.
“Money talks,” said John O’Connell, who runs independent asset manager Davis Rea Investment Counsel and was formerly a top financial adviser at RBC Dominion Securities. And the banks know it, he argues. “They have always used compensation as a behaviour control.”
This matters more than ever. Despite all the hype around low-cost, exchange-traded funds, mutual funds are still a big deal in Canada – they account for 36 per cent of the country’s $4.5-trillion in financial wealth, more than bank deposits. And the banks are becoming ever more powerful in this market, as they continue to scoop up competitors. Scotiabank has been particularly acquisitive lately, buying Jarislowsky Fraser Ltd. for nearly $1-billion and MD Financial for $2.6-billion this year – two respected independents.
This consolidation is playing out against a new backdrop. For many years, banks have benefited from a lending boom spurred by ultralow interest rates. That phase is coming to an end. The lenders now refer to the “decade of wealth,” noting that baby boomers will be retiring in waves and they will need help with investments, which should drive growth.
Independent financial-advisory firms still have the highest number of advisers – about 30,000 of them. However, this segment of the market usually has clients with much smaller account sizes, according to Strategic Insight.
The banks, meanwhile, now have roughly 10,000 advisers located in their branches, who mostly sell mutual funds to the “mass affluent” market, or clients with, say, $50,000 to $250,000 in investable assets. Within the branches, banks can try to cross-sell funds to their banking clients, and credit cards and mortgages to their wealth-management clients.
The banks also employ about 80 per cent of the approximately 10,000 “full service” retail brokers in Canada, who are licensed to sell all types of securities, not just mutual funds, according to Strategic Insight.
If regulators care about investors, they’ll stand up for the remaining independents – which means firing the occasional rifle shot to the banks when they step out of line. The $1.1-million fine for RBC is laughable for an institution that made more than $3-billion in its most recent quarter.
The fine shouldn’t be the end, either. The regulators ought to study how banks sell funds and other wealth management products, and whether or not the playing field is fair and competitive enough. Recent rules that mandate more fee disclosure will never be enough.
What the banks have done to build scale in wealth management makes sense in a world where a select few platforms – Amazon, Facebook, some others – wield immense power. But abusing that scale, to the detriment of investors, should never be allowed to fly.