In response to recent research into mutual fund fee structures, Ontario’s independent Investor Advisory Panel (IAP) says that regulators should eliminate conflicted compensation structures and introduce a fiduciary duty for investment advice.
In an email to the Ontario Securities Commission (OSC), the IAP, which serves as an independent voice for investors in Ontario, says research commissioned by the Canadian Securities Administrators (CSA) on mutual fund fees, “provide[s] compelling evidence of a fundamental misalignment between the actions of commission-based advisors and the needs and interests of their clients.”
In late October, the CSA released the results of research it had commissioned from Douglas Cumming, a finance professor at the Schulich School of Business at York University in Toronto, which looked at 10 years of data provided by the fund industry on fund sales. The research aimed to discover how fund fee structures affect sales and returns.
The IAP points out that the research found mutual funds with trailer fees perform worse than other funds, and that these funds nevertheless attract higher inflows from investors. Further, the IAP says, the research shows that “investors are paying the price for regulatory gap inaction because they are being put into poorly performing mutual funds with conflicted remuneration designed to ensure that their advisors get paid.”
These findings “highlight clearly the dire need in Ontario for a best-interest standard whereby advisors are bound to act in the best interests of their clients at all times,” it says.
The IAP calls on the regulators to do away with trailer fee structures: “The panel urges the OSC to act on the findings of this research and produce meaningful reforms that would see investors come first in their relationship with advisors. To that end, we once again urge the OSC to prohibit the payment of embedded trailer commissions.”
Adds the IAP: “A best-interest standard would immediately require advisors to be the true agents of their clients, putting clients’ interests first. This framework would go a long way toward correcting the misalignment so starkly presented in the research paper. A best-interest standard is a basic first step in investor protection and it is long overdue.
“We reiterate our recommendation that Ontario be prepared to go it alone should other members of the CSA choose not to act in response to this research,” the IAP concludes.
The CSA has said that it intends to make policy decisions in this area in the first half of 2016.
See also: Best interest standard
See also: OSC Dialogue: Disclosure not enough to protect investors