Regulators should move carefully and cautiously on any decision to ban embedded sales commissions in investment funds, and learn from the experience of other markets before implementing change in Canada, Glen Gowland, chairman of the Toronto-based Investment Funds Institute of Canada said in a speech at the association’s annual conference Wednesday.
The industry is currently contemplating the implications of a discussion paper introduced by the Canadian Securities Administrators early this year on the topic of banning embedded commissions, and has received a barrage of varying reactions from industry and consumer representatives. Gowland’s view is that Canada should take the time to study how any changes in fee structure could affect investor access to advice as well as cost. It’s also important to bear in mind the differences between Canada and other markets such as the U.S., Australia and the U.K.
“As Canadians we are sometimes accused of having an inferiority complex, often looking to other jurisdictions for guidance on what we should be doing,” said Gowland, managing director and head, Canadian wealth management advisory at the Bank of Nova Scotia. “If you remember only one point from my remarks today, I hope it will be this: We need to proceed with caution before importing solutions that have been shaped by non-Canadian legal, business and cultural frameworks. An important place to start is to understand the context existing in other jurisdictions and the impact of their changes on the market.”
He stressed that Canadian investors at every level currently have access to a wide range of financial products through a variety of channels, with advisors being the most popular way for Canadians to buy mutual funds. The new Client Relationship Model amendments include requirements for registered dealers to provide their clients with annual reports that show them in dollars what their dealer was paid, and in dollars and percentages how their investments performed during the year and for longer periods. This information gives investors specific information on the cost of advice, and its value can be measured against investment performance. In addition the new two-page Fund Facts document highlights key information, including a fund’s holdings, performance, risk level, expenses, fees and the compensation paid to advisors.
It will take a few years for these initiatives to be fully assessed in terms of whether they are sufficient to provide transparency and accountability on fees.
“Once their impact is understood, regulators, investors and the industry will be able to develop informed views as to whether further changes are advisable,” Gowling said.
In the U.K., regulations are now in place that require that fees for advice be separated from the price of funds, but the transition to this new system has been difficult, Julie Patterson, director of authorized funds and tax and the U.K, based Investment Management Association told the conference. She warned of the “law of unintended consequences,” saying that the convoluted method of separating expenses from the funds has led to U.K. investors being more confused and paying no less.
“As far as the mechanism for disclosure of advisor fees, I fail to understand how anyone can think it could help even the most educated consumer understand what is going on at the funds,” she said.
She pointed out that intermediaries are still being compensated, “and at the end of the day the total cost to the investor may well be going up and not down.”
Nonetheless, Chris Hodgson, head of global wealth management and insurance or the Bank of Nova Scotia, told the conference fee transparency is a “big issue” for the industry, and that advisors should expect continued downward pressure on fees in the current environment of low growth and low returns. Investors are becoming increasingly knowledgeable about costs and competing products, such as exchange-traded funds are making inroads, he said.
“It will become harder to defend the fee structure of the past,” he said.