Special Feature

The end of embedded commissions? How we got here

The Canadian Securities Administrators (CSA) published a consultation paper on Tuesday in which it proposes to consult with stakeholders for an extended comment period of 150 days on the option of discontinuing embedded commissions and making a transition to direct pay arrangements.

 

The move to consider a ban on embedded fees follows research the CSA commissioned from York University professor Douglas Cumming in 2015, which showed that these compensation structures distort sales and impact investment performance.

 

Included in this special feature are the notable developments in this area over the past few years highlighting how we got to the release of the CSA's consultation paper. Photo copyright: cherezoff/123RF.

From the Regulators

Finance professor to investigate whether commissions influence fund sales

By James Langton |

A York University finance professor has been tapped by Canadian securities regulators to answer the fundamental question of whether sales and trailer commissions influence mutual fund sales — research that will help push regulators toward a decision on whether to reform industry fee structures.

The Canadian Securities Administrators (CSA) said Friday that Douglas Cumming, professor of finance and entrepreneurship and the Ontario research chair at York University's Schulich School of Business in Toronto has been selected to carry out critical research into mutual fund fee structures. Cumming has been hired for a project to collect and analyze data on whether commissions influence fund sales.

The CSA has also hired the Brondesbury Group to assess whether the use of fee-based vs. commission-based compensation structures change the nature of advice, and affect investment outcomes, over the long term. That research is to be based on a review of existing literature on the issue.

Both reports are to be completed and released to the public in the first quarter of 2015. The CSA says that the two research projects represent "an important step in advancing a policy decision on mutual fund fees". Back in late 2012, the CSA published a discussion paper that identified several investor protection issues that may arise in the current fund industry fee structure; and, it proposed several possible regulatory responses, including an outright ban on trailers. Earlier this year, it committed to commissioning independent third-party research to evaluate whether regulatory action is needed on these fees. (See CSA calls for independent research on fund fees, investmentexecutive.com, July 24, 2014.)

As part of his research, Cumming will be requesting data from a representative sample of investment fund managers in the coming months, the CSA notes.

"Receiving this data is important to ensuring that any policy initiatives in this area are well-founded and supported by quantitative information," it says.