Douglas Cumming, the York University business professor who produced a critical research study for the Canadian Securities Administrators (CSA) on the impact of fund fee structures, is defending his work — and its fundamental conclusion that trailer fees have a negative impact on investment performance — in a letter to the Ontario Securities Commission (OSC).
Cumming’s letter responds to a report that was published by PricewaterhouseCoopers LLP (PwC) in June. That report includes comments on Cumming’s CSA paper, which was published in 2015.
The PwC paper was commissioned by the Investment Funds Institute of Canada (IFIC), which opposes a possible ban on trailer fees to address regulators’ concerns that they create conflicts of interest, distort markets, and affect investors negatively.
Read: IFIC proposes various measures instead of a ban on embedded fees
The PwC paper echoes the industry’s position, concluding, among other things, that “there is no significant evidence that embedded commissions in Canada have been leading to conflicts of interest influencing financial advisors’ behavior.” It adds that a ban would have other effects, such as reducing access to advice and the paper includes critiques of Cumming’s research from a handful of academics.
In his letter, Cumming responds to various academic questions involving the details of his research methodology, noting that he has updated the paper in response to some of the feedback that it has received over the past couple of years, but that he has not issued a new version of the paper “because none of the main conclusions … have changed.”
Specifically, Cumming notes that various methodological tweaks, or additional robustness tests, do not alter the conclusions that “trailer fees raise the flow-performance intercept, lower the flow-performance slope, and are associated with worse performance over time.”
The letter also takes issue with IFIC’s use of the term “peer review” to describe the critiques of Cumming’s work that are included in the IFIC-commissioned PwC paper. “This label of ‘peer review’ is grossly misleading, as these reviews are ‘paid reviews’ paid for by IFIC to further their lobbyist efforts,” Cumming states.
The comment period on a proposed trailer fee ban closed earlier this year, and the CSA is continuing to consult on whether to proceed with a ban.
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