While the mutual-fund industry may have dodged a bullet in a recent regulatory decision that continues to allow embedded advice fees, ETF providers remain confident that investment advisers are already pivoting toward fee transparency.
Executives in the exchange-traded funds business say investors have already set the ball rolling with greater shifts into lower-cost products – including fee-based accounts without commissions – which will be a big plus for ETF growth.
On June 21, the Canadian Securities Administrators (CSA), an umbrella group for all provincial securities commissions, announced it would not go ahead with a widespread ban of trailing commissions. Rather, only in certain situations – such as in discount brokerages and mutual funds that charge a deferred sales charge (DSC) – will these commissions be prohibited. As well, regulators will only permit trailers when advisers determine that the related funds are “suitable” for their clients.
“Investors want to know upfront what they are paying for an investment product,” says Steve Hawkins, president and co-chief executive of Horizons ETF Management Canada Inc. “The good news is that the industry has already substantially moved this way. Whether it’s the big move toward fee-based advising that we’ve seen at the dealer level, or industry initiatives at the product provider level ... most people recognize the future of investing is one of fee transparency and an increased fiduciary obligation to do right by your clients.”
Trailer fees are embedded commissions paid by mutual-fund companies to compensate financial advisers and firms that sell their funds and can range from 0.5 per cent up to 1.5 per cent. But many investors are not aware these fees are paid out to an adviser, which can create a conflict of interest when it comes to advisers recommending which funds their clients should buy.
Despite the absence of an outright ban on trailing commissions, ETF executives say the CSA’s decision will help highlight the benefits of ETFs.
“For now, the regulators will allow retail advisers to receive some forms of embedded commissions, however there is going to be a much bigger spotlight on those advisers justifying the selection of an A-class mutual fund for their client,” Mr. Hawkins says. (A-class funds include an advice fee, unlike F-class funds.) “Since almost no ETFs pay trailer commissions any more, it stands to reason that ETFs will undoubtedly benefit as advisers move away from using mutual funds with these embedded commissions.”
Mr. Hawkins believes the industry will likely end up eliminating all trailers as the announcement mandates the wealth industry moves to adopt a system that is focused on a stronger independent fiduciary role for advisers and also a shift into fee-based models. Fee-based clients pay their adviser directly for advice, typically between 1 per cent to 1.5 per cent of the value of their account per year.
“ETFs have experienced exceptional growth over the past few years, and while the proposals stopped short of an outright ban on embedded commissions, there is already a strong organic shift toward fee-based, rather than commission-based financial advice models,” says Atul Tiwari, managing director and head of Vanguard Investments Canada Inc. “This bodes well for increased use of ETFs.”
Christopher Doll, vice-president of ETF sales and strategy at Invesco Canada, agrees the industry has already done a good job shifting to a fee-based model.
“[Invesco] have moved very heavily away from assets coming in from our DSC and trailing commission products. [Investment flows] are now almost predominately from our fee-based funds, ETFs, platform-traded funds and separately managed accounts,” Mr. Doll says.
The outright ban on DSC funds has also levelled the playing field between mutual funds and ETFs, adds Mr. Doll.
“You have a situation now where you will effectively have one mutual-fund series – once they do decide to retire all the DSC – that advisers can choose that is unbiased by any trailing commissions being paid out and you have the same thing on the ETF side,” Mr. Doll says. “You have one ETF – and so you are able to make a easier comparison between apples to apples of the fee differences between the two strategies.”
Clare O’Hara