After Douglas Cumming wrote a report critical of Canadian mutual-fund fees, he was summoned to meet with the head of a large fund company in Toronto.
The chief executive opened the conversation with a morbid prediction. "On your gravestone, it's going to say: 'Responsible for the death of the Canadian mutual-fund industry.'"
"It's not my fault," the York University finance professor and Ontario Research Chair replied. "Blame the data."
To Prof. Cumming, the data tell an undeniable story about trailing commissions on mutual funds. Also known as trailer fees, these hidden sales commissions paid to financial advisers create conflicts of interest to the detriment of Canadian investors, he said.
The fund industry itself sees trailer fees differently. The Investment Funds Institute of Canada (IFIC), which is the voice of the industry, says there is no clear evidence of investor harm and that Prof. Cumming's research has "serious limitations."
"They've really tried to attack my credibility," Prof. Cumming said. He has spent much of the last two years defending his work on mutual-fund fees.
For years, the Canadian mutual-fund industry has successfully resisted efforts to reform fee structure. But the days of the status quo are numbered, according to Canadian securities regulators, who are inching closer to changing the rules on embedded commissions amid a consultation and review process that has dragged since 2012.
But the fund business is not giving up on trailer fees without a fight.
Those fees are paid to financial advisers by fund companies for selling their products to individual investors. The typical Canadian fund has a 1-per-cent fee each year that pays out for the length of time the investor owns the fund. Canadians collectively have $1.4-trillion invested in mutual funds, on which they pay trailer fees of more than $6-billion a year.
Trailer fees are often described as an indirect way Canadians pay for financial advice. But the common concern is that they create a conflict of interest for advisers, who might be motivated to put and keep clients' money in funds that pay higher fees.
Prof. Cumming and co-authors were commissioned by the Canadian Securities Administrators (CSA) – an umbrella group for the provincial securities regulators – to see whether the fund data showed evidence of those conflicts
The report highlighted two main findings. First, investor money was directed toward funds with higher trailer fees. And second, funds with higher trailer fees seem to be associated with worse performance, even before deducting the fees themselves.
In those results, the professor saw evidence of conflicts of interest causing harm to Canadian investors.
"As academics, we couldn't care less what the data say," Prof. Cumming said. "To be honest, if I found the opposite result, it would have been a lot easier."
He was taken aback by the hostility directed at his research, he said. In early 2016, he presented his work at a mutual-fund event in downtown Toronto. "The level of anger was shocking. Some people joked with me that they'd give me safe passage to the exit."
Dan Hallett, principal with investment counselling firm HighView Financial Group based in Oakville, Ont., and who has been in the fund business for 23 years, said that backlash does not surprise him. "The industry is under pressure, and a paper like that is going to elicit a strong reaction."
From the industry's perspective, the response was "robust," said Ian Bragg, IFIC's director of research and statistics.
The objection within the fund business seemed to be that Prof. Cumming was drawing conclusions on the implications for individual investors, while his research was based on aggregated fund-level data on performance and fund flows.
"What it can't explain is [individual] investor outcomes, and whether advisers are chasing higher trailers, because it's aggregated return data," Mr. Bragg said.
In a submission to the CSA in June, IFIC proposed alternatives to banning embedded commissions, and presented research challenging Prof. Cumming's report.
The submission included the criticisms produced by four academics who questioned Prof. Cumming's methodology, data and conclusions.
A PwC report commissioned by IFIC, meanwhile, suggested that "there is no significant evidence that embedded commissions have been leading to conflicts of interest influencing financial advisers' behaviour." Banning this form of compensation would likely have negative unintended consequences such as reducing access to financial advice, the report stated.
And Investor Economics prepared a report for IFIC that found "the statistical relationship between trailer levels and net flow volumes is not significant."
None of which amounted to a convincing rebuttal, Prof. Cumming said. The Investor Economics report "ignores over half a century of econometrics and statistics," he said. PwC lacked scientific methodology entirely, he said. And the four scholars raised concerns and alternative methods he already accounted for.
"We'd already tried all the things they suggested, and it made absolutely no difference," he said. No matter what specifications he ran, he got comparable results. "You'd have to be willfully blind to not see what the data are telling you."
Mr. Hallett said his own experience in the fund business is consistent with Prof. Cumming's broad conclusions, that products paying above-market commissions attract higher sales.
If the best interest of the investor is not the driving motivation, then the optimal outcome for the investor will not necessarily be the result, Mr. Hallett said. "Whenever an investment decision is made for reasons other than what makes sense for clients, you have an environment where harm is inevitable."
But after years, even decades, of debate over hidden mutual-fund fees, change does finally seem to be on the horizon, Mr. Hallett said.
"The industry has been very successful over the years of either killing regulatory reform or diluting it. Lately, they've been losing that battle."