“Retail investors have never felt so alone as they do now.”
So says Ruth Elliott from Edmonton, Alta. in a comment letter responding to CSA’s proposed ban of deferred sales charges (DSCs).
In their submissions, several investors condemn regulators for continuing to allow DSCs. They also express exasperation that the current consultation is required, considering the issue has been under review since the 1995 Stromberg report.
The CSA released its proposal to ban DSCs, including low-load options, and limit the use of trailing commissions in September. On the same day, the Ontario government indicated it doesn’t support the reforms.
“One has to wonder how the CSA deals with less obvious investor abuse when they need to ask about blatant investor exploitation of great magnitude,” says Elliott, specifically referring to trailers paid to brokers who provide no advice.
D. McFadden says in her comment letter that the consultation isn’t worthy of a reply. “We are asked to take part in ongoing fake consultations. […] If there were an impartial independent ombudsman for handling complaints against negligent regulators, I would be sending my comments there.”
Elliott calls attention to the sale of back-end load funds when 0% front-end load funds are available, as well as the practice of DSC funds typically being sold by advisors who are just starting out.
“To say that clients should be charged more or charged differently or charged a different load because it is for a higher cause, saving independent firms or helping new salespersons start their business is just plain wrong,” she says. “The motivation to sell vs. provide trusted advice is improperly skewed when the DSC option is available.”
Other investors agree.
In his comment letter, Alan Blanes writes, “Why should investors be responsible for financing salespersons? Why isn’t the CSA holding dealers responsible for financing their own sales force?”
Likewise, Isaac Glick says in his letter that DSCs are primarily attractive to firms unwilling to pay a fair wage to advisors and that want “the huge 5% upfront payment to cover salary independent of the harm to small investors.”
When DSCs are in use, “The advisor-client relationship is weighted too much in the salesperson’s favour,” says Art Ross in his comment letter. Further, fund salespersons’ conduct is below reasonable standards of care, he says.
“They don’t disclose risks, alternatives and expenses adequately,” he says in his letter. “They are, based on empirical research, subject to commission conflicts-of-interest. If it weren’t so, the commission model would be seen to be more fair and effective by the public and the regulators—not by dealers/advisors only.”
He doesn’t accept the argument that DSCs keep investors invested during a market downturn, saying that’s the advisor’s job.
In its comment letter, CARP says the claim that eliminating DSCs will result in less investor choice is a “false narrative,” considering investors’ lack of financial literacy.
“No informed, rational investor would choose to invest in a fund with a 5% up-front commission and a locked in time-frame, over a 0% front-end load version,” says the letter. “This is not choice—this is exploitative of less informed, less advised consumers.”
CARP has lobbied the Ontario government to support the CSA’s proposals.
Similarly, FAIR Canada in its comment letter says DSCs are rife with conflicts and target the most vulnerable investors, with “strong evidence of mis-selling.” It estimates that $464 million in redemption fees was paid by Canadian investors in 2016.
FAIR Canada says that, given the problems with DSCs, regulators shouldn’t be concerned about a ban’s impact on business models that are based on DSCs.
“As they have done ably in the past (e.g., negotiated trade commissions, OEO trading and CRM requirements), firms are resilient, adaptive and will innovate and adjust,” says FAIR Canada. FAIR’s letter also provides examples of the many industry players who support the ban.
One letter submitted anonymously needed just two sentences to make its argument: “I support this amendment. My family members and I have been burned by DSC, designed to benefit the advisor and [mutual fund] manager while taking hostage [of] client’s money with no incentive to deliver performance.”