New transparency rules coming into effect will be a boon to sales of exchange-traded funds as more Canadian investors find out how much of their hard-earned dollars are going to paying investment fees rather than bolstering their retirement nest egg, said Susanne Alexandor, managing director and head of wealth management at Cougar Global Investments Inc.
"As client fees become more transparent, some investors are going to get sticker shock in what they are paying, particularly if they are in mutual funds with high MERs [management expense ratio fees]," said Ms. Alexandor, who constructs globally diversified portfolios of ETFs for high-net-worth clients. "As a result, investors are going to be drawn to lower-cost options such as ETFs."
ETF fees can vary depending on the investment mandate but average around 0.5 per cent. A high-end ETF can charge up to 1.5 per cent while some mutual fund fees can be as high as 2.5 per cent.
Industry regulators have been pushing for greater transparency of fees for some time. That transparency is on its way. As of July, 2016, when the second phase of the Client Relationship Model (known as CRM2) comes into effect, it will be mandatory for investment advisers to disclose all investment fees and investment performance directly to their clients.
In addition, the Ontario Securities Commission is still reviewing whether regulators will ban trailer fees altogether. (Trailer fees, also known as trailing commissions, are paid to an investment adviser for every year an investor holds a specific mutual fund.)
"CRM is going to further drive the growth of ETFs because it's going to provide greater information on fee transparency, and there are a number of investors who do not understand what they are paying for," said Atul Tiwari, managing director at Vanguard Investments Canada Inc. "Also, if regulators take a stronger step to ban commissions outright, then we will definitely see even stronger growth in the ETF space."
As a result, financial advisers may reconsider how they are charging clients for financial advice, Mr.Tiwari said.
For some commission-based advisers, this could mean shifting to a fee-based platform. Fee-based advisers don't collect trailing commissions on investment products. Clients are charged a percentage of their assets regardless of the products they hold in a portfolio, usually around 1 per cent to 1.5 per cent.
"It is all about transparency to the advisers and to the clients," said Steve Hawkins, co-CEO of Horizons ETF Management (Canada) Inc. "Advisers haven't traditionally had to disclose commissions that they are charging to the clients, and under the fee-based methodology they still don't have to disclose the cost per trade."
The shift to the fee-based platform is one that has been slowly happening over the last 20 years, but the industry will see that rise more as transparency increases, said Dan Richards, CEO of Toronto-based ClientInsights, a consultant to financial advisory firms.
"Now with the higher awareness of fees, and what clients are paying coming into effect next year, that growth of fee-based advisers is only going to accelerate," said Mr. Richards. "It will make this an even more pressing issue for advisers."
Both Australia and Britain have implemented similar fee transparency models.
In Australia, a new regulatory mandate called the Future of Financial Advice (FOFA) highlighted investment fees and led to investors moving toward lower cost products. After the implementation of FOFA, the use of ETFs almost doubled, according to June, 2014, data provided by the Australia Stock Exchange. Over an 18-month span assets rose to $11.9-billion (Canadian) from $6.54-billion.
In 2012, Britain implemented the Retail Distribution Review, a regulatory change that affected how investors were paying for financial advice. In a recent review by the Financial Conduct Authority, Britain's financial industry regulator, it stated there has been a noticeable decline in the sales of higher commission financial products.
As of February, Canadian-listed ETF assets were $81.4-billion. As the industry sees more clients enter into fee-based arrangements with their advisers, or shift to robo-advisers or online brokerage platforms that offer low-cost portfolios, ETF growth will expand, said Mr. Richards.
"Advisers are now in a situation where there is much more of a focus on investment fees, and that is where ETFs will come into play," Mr. Richards said.
Ms. Alexandor said her firm has seen significant ETF growth in the U.S through fee-based advisers.
"We will see the same in Canada as CRM2 shifts advisers onto a fee-based platform," said Ms. Alexandor. "Clients will become aware of the low-cost offering that ETFs can provide."