Report on OSC Fees Roundtable
"If there's anything in the whole world of mutual funds that you can take to the bank, it is that the expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."
Russell Kinnel, Morningstar
"Under plausible conditions, a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20 percent higher than that of a comparable investor in high-cost investments."
William F. Sharpe, Nobel laureate
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At the OSC's Mutual Fund Fees Roundtable, held on June 7, 2013, retail investor-focused representatives took members of the mutual fund industry to task for their refusal to acknowledge that reform is needed to address the high, opaque, and conflicted fees associated with many Canadian mutual funds. Strong representation by investor representative groups and investor-friendly members of the financial industry refuted and challenged weak, self-serving industry lobbyist arguments.
FAIR Canada participated in the first panel, and continued to stress the need to remove the conflicts of interest from the current remuneration structure for the sale of mutual funds which can lead to poor investment recommendations for consumers and higher costs.
The following is an overview of some of the interesting points that were raised during the four hour-long roundtable discussion. FAIR Canada sincerely thanks the OSC for hosting this informative event, and encourages meaningful progress on this important initiative.
Conflicts of Interest
FAIR Canada found it disappointing that some members of the mutual fund industry refuse to acknowledge that commission incentives influence the sale of mutual fund products. As summed up by one industry participant who favours a ban on third-party embedded commissions: "... compensation drives advice and that embedded-compensation causes bias... it is widely accepted as a self-evident truth that embedded compensation causes bias." Another industry panelist who advocates for the continued use of trailing commissions, admitted that "...compensation does have a minor, I guess, impact on the advice channel..." while suggesting that, generally, most funds pay a "standard" 1% trailing commission.
In response to industry representatives' pleas to wait to see the implications of other initiatives underway in Canada, including the Client Relationship Model (CRM) and Point of Sale (POS) disclosure for mutual funds, Commissioners were cautioned that disclosure does not go to the root of the problem. CRM and POS will not address the misaligned incentives imposed by third-party commissions and, therefore, consumers will still be subject to higher-than-average fees, poor advice and distribution of inferior products due to incentives central to the current mutual fund fee structure.
It was also pointed out that, in addition to the U.K. and Australia, developments to ban distribution fees are underway in European jurisdictions, including Germany and the Netherlands, and that the E.U. is working on an initiative expected to be introduced in approximately two years for broader implementation. Early observations from the U.K. are also that prices are coming down and access is increasing. Canada is lagging behind.
Please click here to read the balance of the Report on OSC Fees Roundtable.