The Ontario Securities Commission says a decision on whether to ban trailer fees on mutual funds won't be coming this year.
In a report entitled "Trailer fees – the meteor is closer than you think," published in the fall of 2014, CIBC analysts Robert Sedran and Paul Holden wrote that a recommendation from regulators on whether to ban trailer fees on mutual funds was expected in early 2015.
Well, forget that. The Ontario Securities Commission says it isn't likely before March 2016.
The review of trailer fees, which are commissions paid annually by mutual fund companies out of the management expenses to the adviser, is already more than two years old. In December 2012, the Canadian Securities Administrators (CSA), an umbrella group for all of the securities regulators, released its initial discussion paper on trailer fees.
One of the main objectives of the review is to find out whether trailer fees generate potential conflicts of interest, encouraging financial advisers to recommend mutual funds that pay the adviser the highest trailer fee but that might not necessarily be in the best interest of the client. Industry observers believe the regulator could introduce a fiduciary duty standard for advisers, and/or an outright ban on trailers, which is the chief source of income for advisers in this country.
In a phone interview, OSC director of investment funds and structured products Rhonda Goldberg acknowledged that the multi-year review has taken quite a bit longer than anticipated. In November 2014, the CSA reached out to Canadian mutual fund companies for detailed trailer fee information. The data was supposed to have been submitted to Douglas Cumming, professor of finance and entrepreneurship at the Schulich School of Business at York University by January 16. 2014. But only a small number of companies submitted their information by the deadline, according to Ms. Goldberg.
"Many of [the mutual fund companies] had concerns over the security, confidentiality and scope of use of their data by Professor Cumming," she said.
In February, Prof. Cumming sent a signed confidentiality agreement to all of the fund managers to assuage their concerns. That seems to have done the trick, because most of the firms have since sent in their data, said Ms. Goldberg.
"We are disappointed that not all fund managers have chosen to participate. But I am confident that we have a sufficient sample for him to do the work for us."
Prof. Cumming has a few months to slice and dice the trailer fee data, and will file a public report on his findings by the summer. After that, the regulator plans to consult further with stakeholders before making its decision.
"We'd like to move the process a lot more swiftly, but we strongly support the regulator's desire to make a carefully, reasoned decision on this issue," said Neil Gross, executive director with the Canadian Foundation for Advancement of Investor Rights in a telephone interview.
Mr. Gross would like to see trailer fees abolished, arguing that it would eliminate or mitigate the risk of conflicts of interest impacting service, allow for better tailoring of advice for customers and stimulate real competition in the industry.
"Many of the thought leaders in the industry seem to be reconciled to that [trailer fee ban] being inevitable, and perhaps even a necessary step into the evolution of the industry, into a true investment advisory profession." he said.
Though a potential ban may be further off, greater transparency is on the way. In July 2016, advisors will have to provide clients with a report, written in plain English, that will itemize all fees, including embedded trailer fees.