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The study that was released on Thursday suggests advisers who are recommending mutual funds to clients are driven by trailer fees.

Matthias Haas/Getty Images/iStockphoto

A new report on the impact of mutual fund trailer fees is eliciting mixed reactions within the investment community.

The report, A Dissection of Mutual Fund Fees, Flows and Performance, was commissioned by the Canadian Securities Administrators – a group representing provincial securities regulators – to assess whether sales fees and trailing commissions influence mutual fund sales.

Led by Douglas Cumming, Ontario research chair at the Schulich School of Business at York University, the widely anticipated report released on Thursday determined that mutual funds that pay trailer fees to financial advisers attract higher inflows of cash from investors even when they perform badly and that those funds tend to perform worse over all than other funds. Trailer fees are those paid to investment advisers annually for as long as a client holds the mutual fund.

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Several of the large mutual fund players in Canada, including CI Financial, AGF Management and Fidelity Investments Canada, have declined to comment on the findings, saying they need more time to review the 108-page report in detail.

Dan Hallett, a principal with Oakville, Ont.-based investment counsellor HighView Financial Group, said he is not sure how the regulators will act on the new data, but expects change is on its way for the current commission structure.

"While I don't expect a commission ban any time soon, it's certainly possible in time depending on the impact of CRM2 [Client Relationship Model 2] and allowing us to gather further data on the U.K., which ripped the Band-Aid off quickly regarding banning commissions," said Mr. Hallett, referring to regulatory changes coming in July, 2016, that will require greater transparency on fees.

Advocis, an industry association for financial advisers and planners, is concerned the Cummings report will reduce Canadians' access to affordable financial advice.

"Upon preliminary review, it appears that the report does not consider the monetary value of the financial advice provided to clients," said Advocis chief executive officer Greg Pollock. "Our anecdotal evidence tells us that Canadians are generally satisfied with the current commission system for mutual funds. There's a cost associated with advice, regardless of how it is paid. Not every Canadian can afford to pay an up-front fee for service, which can be several hundred dollars an hour."

Neil Gross, executive director of FAIR Canada, an investor advocacy group, disagrees, saying Prof. Cumming's analysis shows that trailing commissions do have an impact on investment in mutual funds, and it's an impact that harms investors.

"It's time for the research to be translated into reforms – either by adoption of a best-interests standard or at least by banning trailing commissions," Mr. Gross said. "It's also time for the investment industry to acknowledge this and make the transformation to professionalism."

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The report, coupled with the regulatory changes outlined in CRM2, is expected to put additional pressure on advisers to consider switching from a commission-based business model to fee-based practices.

Currently, 32 per cent of advisers say investors question their fees, according to research by Accenture. With the investment landscape starting to shift, the number of advisers moving to a fee-based platform will start to rise, says Kendra Thompson, Accenture's North America lead for Wealth and Asset Management Services

"The situation isn't all doom and gloom in the industry, but there is going to be a lot of change and possibly very quickly for both the mutual fund companies and the investment dealers," Ms. Thompson said.

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