The Canadian Securities Administrators on Tuesday published the responses to questions received by the authors of a research report on mutual fund fees. The report, A Dissection of Mutual Fund Fees, Flows, and Performance, found that mutual fund trailer fees and affiliated distribution structures influence sales and, ultimately, harm investors.
Last fall, the Canadian Securities Administrators (CSA) released the results of research commissioned by the CSA and led by Douglas Cumming, finance professor at the Schulich School of Business at York University in Toronto. That research found that the existence of trailer fees and affiliated distribution arrangements both affect fund sales and lead to lower returns for investors.
See: Hard data on the impact of trailer fees
Today, the CSA published Frequently Asked Questions on Report and Additional Analysis (FAQ), in which Cumming and his fellow Schulich researchers, Sofia Johan and Yelin Zhang, respond to many of the questions that the research team has received on their research. The CSA also published an updated version of the paper, which includes a correction to one number — the original paper underestimated the negative impact of a hefty 1.5% trailer fee — along with the results of some additional analysis the team carried out to validate the results.
In addition to answering specific questions about the data used in the research, its methodology and the paper’s findings, the FAQ report expands on some of the original report’s conclusions. For example, in response to questions on the “value of advice,” the researchers reiterate that their work found that incentives such as trailing commissions, affiliated dealer arrangements and deferred sales charge commissions “do in fact result in material conflicts of interest that are detrimental to mutual fund investors over the long term.”
The FAQ report states that it is possible that investors receive other benefits from advisory relationships, but these “would need to be quite substantial (in terms of improving risk adjusted returns) to offset the foregone returns stemming from the use of trailing commissions, deferred sales charge arrangements and dealer affiliation.
“Furthermore,” the FAQ report adds, “since fee-based advisor/client relationships would no doubt share in these other potential benefits, then it must still be the case that investor outcomes are materially improved when the advisor is not paid via trailing commissions, when the investor does not enter into a deferred sales charge arrangement and when the fund manufacturer and fund dealer are unrelated.”
The researchers also note that that they have carried out additional analysis to “address any remaining doubts about the validity, veracity and applicability of our results … The results are the same; trailing commissions still drive flows and have a negative effect on future alpha and these results are both economically and statistically meaningful.”
On the question of whether regulators should be more concerned about the use of trailer fees or affiliated distribution arrangements, the researchers note that they don’t know what the bigger worry should be for regulators, but that both of these structures harm investors.
The researchers also address the question of whether it makes sense to use past performance as an indicator of the value of advice. “In terms of chasing past performance, while we are routinely warned that past performance may not be a good indicator of future performance, this is not tantamount to saying that past performance has no value, particularly in markets where capital is being allocated inefficiently,” the FAQ report states.
Finally, the FAQ report includes a critique of a paper commissioned by the Investment Funds Institute of Canada (IFIC) from Toronto-based research firm Investor Economics, on the value of advice.
The Ontario Securities Commission (OSC) is hosting a webinar with Cumming on the research and its findings on Feb. 11 in Toronto.