Although the researchers who examined the impact of current investment industry fee structures and compensation arrangements on investors for the Canadian Securities Administrators (CSA) say the data they’ve accumulated reveal the effects are negative, they’re careful to avoid prescribing any regulatory fixes.
The Ontario Securities Commission (OSC) hosted a webinar on Thursday with the two lead researchers who carried out a pair of major projects for the CSA last year as part of the regulators’ ongoing examination of mutual fund fee structures and conduct standards: Edwin Weinstein of the Brondesbury Group, who published a literature review that focused on industry compensation structures, and York University professor Douglas Cumming, who carried out primary research on the impact of mutual fund fee structures on asset flows and fund performance, participated in the session.
Both researchers explained the results of their work, highlighting areas in which their research revealed conflicts and evidence of the negative effects of prevailing investment industry practices. However, they steered clear of recommending any specific regulatory intervention.
Cumming, who released a frequently asked questions document earlier this week addressing many of the questions he’s received since his paper was published last autumn, expanding on some of his results, stressed that his conclusions are purely based on his statistical analysis of the data. In Thursday’s webinar, he explained that the data revealed statistically significant relationships between mutual fund fee structures, fund flows and performance that may give rise to regulatory policy concerns.
In particular, the research found that trailer fees and affiliated distribution structures impact mutual fund flows and future performance. And in response to a question on which issue — affiliated distribution or fee structures — represents a bigger problem for investors, he demurred, saying both are “problematic.”
Similarly, Weinstein outlined the results of his research, including his findings that all forms of compensation (fees, commissions, etc.) have an impact on investor outcomes and that “the negative effects of commission are well documented.” However, he also avoided policy prescriptions, noting that changing compensation structures won’t necessarily leave investors better off — nor would banning commissions put an end to mis-selling, he said.
If commissions were banned, Weinstein suggested that there would likely be numerous effects, including more sales of lower-cost products, less sales of third-party products, more client segmentation and greater use of technology to service clients. In addition, firms would likely turn to other incentives to drive advisors to accumulate assets in a similar way to commission grids, he noted.
The CSA has indicated that it intends to make a policy decision on these critical issues — whether regulators should intervene with mutual fund industry fee structures or reform industry conduct standards — in the first half of this year.