The Canadian Securities Administrators' (CSA) new research report into the impact of mutual fund fee structures on mutual fund sales and investor returns is getting significant reaction among groups representing clients and the investment industry itself.
On the one hand, investor advocates are calling on the CSA to ban trailing commissions while the investment industry opposes any immediate action without evaluating the impact of regulatory reforms, such as the second phase of the client relationship model (a.k.a. CRM2), or taking into account the value of financial advice.
The CSA commissioned a team of academics, led by professor Douglas Cumming of the Schulich School of Business at York, to produce the research report, which found that mutual fund commission structures, particularly the use of trailers, influence mutual fund sales and impact investors' returns.
In response to that report, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) says that it's time for regulators to act.
"Prof. Cumming's findings validate much of what previously had been thought about trailers, and the findings accord with common sense," says Neil Gross, executive director of FAIR Canada. "They cannot be ignored. 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."
The CSA has not yet committed to any reforms in response to the research findings. Instead, the regulators say they will reach a policy decision some time in the first half of 2016.
In contrast, the investment industry, naturally, is opposing any regulatory action. In particular, the Investment Industry Association of Canada (IIAC) reiterates its position that forthcoming regulatory reforms — such as the implementation of CRM2 reforms and the adoption of requirements to deliver Fund Facts disclosure at the point-of-sale, which are both scheduled for next year — should be "fully implemented and evaluated before a decision is made on whether there are any remaining areas that require additional policy reforms."
In addition, Advocis cautions against making any regulatory reforms that could result in a reduction in the availability of financial advice.
"Upon preliminary review, it appears that the report does not consider the monetary value of the financial advice provided to clients," says Greg Pollock, Advocis president and CEO. "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 upfront fee for service, which can be several hundred dollars an hour."
Yet, FAIR Canada insists that the industry should drop its opposition to change. Gross says that it's "time for the investment industry to acknowledge [the need for reform] and make the transformation to become true professionals. That's what Canadians want them to be, and need them to be."