FAIR Canada
FAIR Canada Newsletter

June 2013

Disingenuous Arguments from Mutual Fund Lobbyists

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

  

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.

 

 

Recent Media on Mutual Fund Fees


More transparency on fund fees? Bring it on!

True professional advisors welcome the unbundling of mutual fund fees. Rob Carrick reports the comments of one such advisor, who states "If you cannot intelligently show your value to the clients you serve once they see their fee or pay you directly, I am sorry; this is not the business for you." FAIR Canada applauds the bravery of this advisor to come out against the powerful industry lobby groups who oppose the banning of embedded commissions. Perhaps younger advisors, who are better able to take a long-term view, are the key to the professionalization of investment advice. We encourage other investor-focused advisors to support the banning of trailing commissions and other conflicted compensation.

 

Other recent interesting articles relating to mutual fund fees include:

 

Analysis: Will banning trailer fees create chaos? (James Langton, Investment Executive) 

Mutual fund investors to receive plain language information about costs, risks (Barbara Shecter, Financial Post)

Embedded mutual fund commissions hurt investors (Rudy Luukko, Toronto Star)

Let's trim embedded fees for mutual fund dealers (Ellen Roseman, Toronto Star) 
Mutual Fund Trailer Fee Ban Should Come Soon (Jacqueline Nelson, Globe and Mail (subscription required))
It's Time to Ban Advisor Commissions (Canadian Couch Potato)

 

Why fees are an investor's worst enemy 

 

In this Globe and Mail investor clinic video, John Heinzl notes that, while there are many factors beyond investors' control, investors do have the power to control costs. He demonstrates the dramatic effect of a small difference in cost on an investor's investment growth, using the Globe and Mail's investment calculator. He says that, "In the long run, fees can cost you big money" and provides some suggestions of ways investors can keep their costs down.

 

 

FAIR Canada Comments on OSC Statement of Priorities

 

On Monday June 3, FAIR Canada provided comments to the Ontario Securities Commission (OSC) that were supportive of its many investor protection-focused priorities, including the creation of the Office of the Investor, examination of a best interest standard and review of mutual fund fees.

 

Please click here to continue reading.

 

 

Media on the Exempt Market: Nearly Half a Billion Dollars of Investor Money Lost

 

A recent Financial Post story by Barbara Shecter highlights the high risk to investors of putting their money in the exempt market and the significant problems of non-compliance with the existing accredited investor rules and consumer protection requirements uncovered in an OSC sweep which has recently been released.  Exempt market meltdowns referred to in the story include New Solutions, First Leaside and Michaels Wealth Management.   
 

 

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