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The investment industry and regulators fought bitterly over reforms designed to reveal the costs of investing. The payoff from that struggle represents billions of dollars each year for investors. The Canadian Securities Administrators (CSA) released research last month examining the effects of Phase 2 of the client relationship model reforms (CRM2), which required fund companies to provide investors with annual reports detailing the costs and performance of their investments.

The theory behind these measures was that improving transparency for investors would help them make more informed investing decisions while stoking competition within the industry.

The CSA’s research, which examined the years immediately before and after the CRM2 reforms took effect in 2016, found that investment fund costs dropped meaningfully during the period.

Overall, the average asset-weighted management expense ratio (MER) for the mutual funds studied declined by 38 basis points between 2013 and 2020. In dollar terms, 0.38% of today’s $2 trillion in mutual fund assets under management is $7.6 billion.

The research found that some of the drop in fees happened because fund companies lowered their MERs, but a greater share of the decline came because investors shifted to lower-cost funds.

While fund fees had already trended lower in the years leading up to CRM2, the decline generally accelerated after the rules were in place.

The regulators caution against confusing correlation with causation. Several non-regulatory factors could have contributed to the decline in average fund costs, including shifting competitive dynamics and overall market conditions.

Yet, investors’ costs moved as regulators hoped they would, and the findings appear to demonstrate that improved transparency affected both investor and industry behaviour.

A key feature of the CRM2 reforms was giving investors disclosure of the costs of investing in dollars and cents. Now, regulators can see how their work paid off in dollar terms too. The result should inspire them to continue driving improvements in investor protection and enhancing industry competition.

This article appears in the May issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.