In an extensive submission to securities regulators, the Investment Funds Institute of Canada (IFIC) defends the current industry fee structure, particularly the use of embedded trailer fees.
Friday was the deadline for submissions on a discussion paper released last year by the Canadian Securities Administrators (CSA) that examines the current fee structure in the funds industry, sets out a variety of regulatory concerns with that structure, and proposes numerous possible solutions, including capping, or even banning, embedded trailer commissions.
The CSA isn’t yet proposing to introduce any of these measures, its paper just lays out the issues and a range of possible regulatory responses, without favouring any particular course of action.
In its submission, IFIC, the mutual fund industry lobby group, defends the status quo. While it allows that the embedded fee structure represents a potential conflict of interest for fund dealers, it says that it doesn’t require further regulation. It argues that trailers are generally uniform within asset classes, mitigating the conflict to sell a particular fund; and, it says that existing obligations on advisors mitigate the conflict between asset classes.
Moreover, it argues that many different financial products utilize embedded fees, and that it’s unfair to single out mutual funds. And, it says that trailer fees aren’t just compensation for advice, they also compensate dealers for a variety of functions they fulfill.
IFIC also argues that the use of embedded trailers favours small investors. “The embedded fee model is of particular benefit to small and first time investors,” said IFIC president and CEO, Joanne De Laurentiis. “Most first time investors in Canada start with less than $25,000, which translates into an annual fee for investment advice of about $100. Compare that to hourly fees of $150 to $300 per hour, and it’s clear that the trailer fee represents exceptional value for smaller investors.” It also points to recent U.S. research that, it says, demonstrates that investor costs have risen as the U.S. market has evolved away from embedded fees.
Additionally, IFIC argues that Canada doesn’t have the same sorts of problems that have driven recent regulatory reforms in other countries, including bans on certain commissions in the UK and Australia.
“The options put forward in the discussion paper are being driven, in part, by changes in other jurisdictions,” said De Laurentiis. “We see no evidence in Canada of the regulatory gaps that drove changes in the U.K. and Australia, and we should be very wary of adopting their approaches without understanding the consequences for investors.”
Instead, IFIC suggests that forthcoming enhancements to the disclosure regime in Canada (such as the latest CSA reforms dealing with cost and performance reporting, known as the client relationship model (CRM) reforms) should be allowed to take effect to determine whether they ease regulators’ concerns about investor awareness of fees.