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The question of whether to crack down on mutual fund fees is more complicated than it seems.birdigol/Getty Images/iStockphoto

To angry investor advocates, the question of whether to crack down on mutual fund fees is an open-and-shut case.

Ever since provincial securities regulators started reviewing whether trailing commissions ought to be curtailed, trailer fee opponents have framed this as a simple issue: To them, investors are getting ripped off because retail advisers simply put client money in certain funds that pay them 1 per cent of the invested assets annually, whether those funds are the best value for money or not.

At first, it seemed the regulators felt the same way – hence the thorough review launched in 2012. However, they've since backtracked, opting to take their time to study the issue in more detail.

Investor advocates don't like hearing this, but it's the truth: The issue is more complicated than it seems.

The problem is that trailer fees are just one item in the investment ecosystem. If the regulators crack down on them, it won't suddenly transform the banks and independent mutual fund companies into clients' guardian angels. And, in one of the worst-case scenarios, a trailer fee ban could persuade brokers to deal only with rich clients.

I touched on some examples of this complexity in my column Tuesday, but there are many more.

Fee-based accounts: If the regulators go so far as to ban commissions such as trailer fees, retail advisers will be pushed toward a fee-based model, where investors pay a fixed percentage of their total assets to their broker each year.

That may seem like a much fairer model, but the problem is that many fee-based advisers won't deal with clients who don't have at least $500,000 in investable assets. Earning $1,000 from a client annually, or 1 per cent of $100,000 worth of investable assets, just isn't worth their time.

If you ban commissions, as Britain has done, it could leave many Canadians hung out to dry – even those with sizable portfolios worth $100,000 to $200,000.

Major changes in the works: Come 2016, investment advisers must disclose how much their clients pay annually in fees and commissions. The financial institutions argue this will be enough to influence investors to seek out the lowest cost advisers.

Trailers not the only problem: If you think mutual fund fees are bad, you should see how much investment advisers get paid for putting their clients into structured products – often as much as 6 per cent. Broker commissions on share sales are also sizable, often ranging from 1.5 to 2 per cent. Trailer fees, meanwhile, have been coming down over time, especially with the rise of low-cost exchange-traded funds.

I maintain that regulators must be bold, and there's no way they can make everyone happy. But nothing in this industry is cut and dried, no matter how much investor advocates wish it was.

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