When it comes to the issue of embedded trailer fees for mutual fund products, mutual fund sellers and manufacturers favour disclosure and choice, while some industry watchdogs favour the outright abolition of trailer fees.

The divide was apparent at Friday’s Ontario Securities Commission roundtable organized to discuss the issues identified in a paper published last December by the Canadian Securities Administrators on fund fees in Canada. Views were presented by a variety of participants representing the fund industry, the distribution arm and the consumer. The regulator’s goal is to determine if any regulatory changes are needed to enhance investor protection in the arena of fees.

“Maintaining the option to pay for advice through bundled fees significantly benefits small investors and the vast majority of Canadians,” Peter Intraligi, president of Toronto-based Invesco Canada Ltd. told the roundtable. “It’s our collective responsibility to preserve this choice.”

Intraligi pointed to initiatives already underway to improve fee transparency by providing investors with separate personalized information on the amounts they are paying to advisors. With this information, it will be easier for investors to compare various fee options and assess whether they are receiving sufficient value from their advisors, he said.

The second phase of these “client relationship model” rules developed by the CSA will come into effect later this year, followed by a three-year implementation process to be completed by 2016.

“We support investor choice,” said Douglas Coulter, president of Toronto-based RBC Global Asset Management Inc. “Clients should be able to seek advice or not, and choose the way in which they wish to pay for that advice.”

For example, some mutual funds are sold with trailer commissions, others have no trailer fee but are subject to a flat fee for service, and others have a smaller trailer fee if they are sold through discount brokers or if the amounts invested are sufficiently large.

“We favour greater disclosure and transparency of what the investor is paying to the fund manager and to the dealer,” Coulter said.

Others at the OSC roundtable argued that trailer fees create an incentive that leads advisors to sell one product over another, even if it’s not in the clients’ best interest.

“Bad advice is given when incentives are given to advisors to sell certain products,” said Ken Kivenko, an investor advocate and chairman of the advisory committee of the Small Investor Protection Association.

He said that while index funds outperform the majority of mutual funds in the long term, they account for only a small percentage of investment assets because “they are not sold.”

“If you remove the embedded commission model you remove the incentives,” said Marion Passmore, associate director of the Canadian Foundation for Investor Rights. “It’s more clear to investors what they pay for advice and what they pay for the product.”

Some of the panelists argued that the abolition of trailer fees would hurt small investors, who benefit in a pooled situation from the share paid by higher net worth investors who pay a similar percentage but bigger dollar amount. If fees for advice are negotiated by small investors on an individual basis these investors might end up paying more, or else decide they don’t want advice. It was also argued that many small investors lack the financial education and motivation to study the various layers of commissions and fees in financial products, and would prefer the simplicity of built-in fee for advice if given a choice.

“We have found that when our advisors explain the fee structure to clients they are grateful, thankful but forgetful,” said Robert Frances, president of Montreal-based PEAK Financial Group Inc. “Some clients prefer the simplicity of bundled fees and would not be pleased if the choice was removed. They’re interested simply in knowing their bottom line performance net of all fees and don’t want to be ‘nickel and dimed’.”

Paul Bates, chairman of the OSC Investor Advisory Panel, and special advisor to the president at Hamilton’s McMaster University, argued in favour of the abolition of trailer fees and said regulators need to get involved in setting an appropriate timetable.

“The industry advisory panel is completely on the side of banning trailer fees,” said Bates whose career has spanned full service brokerage and discount brokerage operations. “That’s also my personal point of view and it’s been a long journey for me.”

Bates said he is a “big believer and a fervent fan of the power of entrepreneurship.” If there is a gap in the marketplace as a result of the banning of trailer fees, the marketplace will step up to fill it, he said.