The financial services sector should be examining the possible effects of a ban on embedded mutual fund fees as opposed to defending the status quo, according to Andrew Kriegler, president and CEO of the Investment Industry Regulatory Organization of Canada, who spoke to financial services executives about the future of financial advice at Morningstar Associates Inc.’s Executive Forum in Toronto on Wednesday.
“It’s clear to many people, although not universally agreed [upon], that there is a predisposition among the [Canadian Securities Administrators (CSA)] members to push forward with this kind of initiative,” Kriegler said. “That behooves us all to start thinking about how to deal with it if that comes to pass.”
Kriegler was a part of a panel discussion that tackled the possible effects a ban on embedded commissions would have on the financial services sector. The CSA released a consultation paper in early January that suggests regulators are leaning toward such a ban — although they are accepting comments from stakeholders about alternatives to a ban until June 9.
One possible effect from the elimination of embedded fees is that it could make the financial services sector less desirable to young adults starting their professional careers, suggested Peter Intraligi, president of Toronto-based Invesco Canada Ltd.
“If you ask a 25-year-old or 30-year-old to start a practice and go immediately into a fee-based environment, it’s financially impossible,” he said. “You need some scale upfront to generate an income to basically live your life.”
Thus, Invesco Canada is proposing that regulators consider capping the embedded fees of mutual funds and streamlining the various types of charges, said Intraligi. For example, equity funds could include a trailer fee of 1% while fixed-income funds would have an attached fee of 50 basis points.
“The idea is that if you have the same compensation structure when it’s embedded in the cost of the mutual fund,” he said, “you eliminate the potential conflicts that exist in recommending one product over another.”
Advisors who feel their services are worth more than the hypothetical fee cap could charge their clients under a fee-based compensation model, he added.
Another possible effect of a complete ban on embedded fees is the widening of the advice gap for the mass affluent market that tends to make the most use of mutual funds with embedded fees, said Martin Lavigne, president of Montreal-based National Bank Financial Ltd., who pointed to the U.K. and Australia, where bans on embedded fees have had a “huge impact” on those households.
However, it’s important to consider the U.K.’s experience, in particular, as that jurisdiction also saw a drop in the sale of mutual funds with high fees, countered Neil Gross, president of Component Strategies Consulting in Toronto and former executive director of the Canadian Foundation for Advancement of Investor Rights.
The financial services sector should also be aware of certain assumptions it’s making about the idea that some clients are not willing to pay for advice, said Kriegler: “In my mind, that’s a paternalistic assumption because it assumes that people can’t make the best decisions for themselves.”
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