The research is in: trailer fees can distort advice and affect investors’ returns. Now, it’s time for regulators to reveal whether they have the courage to act on that fact.
Almost three years ago, the Canadian Securities Administrators (CSA) first spelled out its concerns with mutual fund fee structures. The CSA’s consultations, roundtable meetings and original research have largely confirmed what regulators surely knew all along – that embedded fee structures can create conflicts of interest, which can harm investors’ interests.
Many in the investment industry remain largely opposed to any sort of fundamental reform regarding mutual fund fees. That’s not surprising, given that the current system has worked well for financial services firms. Any change that could disrupt such an arrangement may be unwelcome.
Inevitably, many investors don’t understand that they are paying trailer fees. For the few who do, the built-in nature of these fees prevents these investors from ensuring that they are receiving value for their money.
The industry implicitly admits this when it argues that outlawing trailers would result in clients with smaller accounts losing access to advice. The underlying premise of that argument is that wealthier clients are subsidizing the advice that smaller investors currently receive. Surely, these richer clients aren’t aware that they are paying for other people’s advice.
The industry also has argued that transparency is the key, and that this will come with the ultimate adoption of the client relationship model reforms. Yet, some regulators in other countries have stated that disclosure doesn’t work – particularly for retail investors, who are at a huge disadvantage relative to the industry in terms of knowledge, resources and bargaining power. And, if disclosure did work as promised, wouldn’t the ultimate outcome be the same? Richer clients would demand lower fees, or more service, thus squeezing out less affluent clients in any case. There are few who expect disclosure to solve fundamental, built-in conflicts of interest.
Structural reform is what is required.
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