The canadian mutual fund sector does not seem to know what is in its own best interests.
According to a recent statement by Glen Gowland, the new chairman of the Investment Funds Institute of Canada and head of Canadian wealth management at Bank of Nova Scotia, the goal of the industry is to “make sure we are not saddled with excess costs of regulation and disclosure, to the point that growth is stifled.”
This statement demonstrates that the investment industry is out of touch with reality and that it needs to defend itself.
But in this climate of regulatory change and rising consumer awareness, I see an industry that always seems to miss an opportunity to miss an opportunity. The investment industry acts more like a marketing machine than an entity that wants to bring a potentially great product – investment funds – to Main Street at a fair price.
The real threat to the industry is not more regulation, as it seems to think. The real threat is an investor rebellion. Regulatory initiatives initiated by the self-regulatory organizations that are already underway are merely a symptom of an industry that doesn’t respect its clients and resists reform with a passion that is ultimately self-destructive. Here’s a small sampling of reasons why the industry is on the defensive:
– Canada has some of the highest investment fund fees in the world. The long-term impact of this on retirement accounts is devastating. An investor awakening, as financial literacy increases, will put even more pressure on the sector.
– This past June, Boston-based DALBAR Inc. released its 2012 Trends and Best Practices in Mutual Fund Statements Study. Relative to other financial services sectors, the study says, mutual fund statements do not provide value-added account details that give investors a well-rounded and complete view of their investments. The majority of mutual fund statements provide only the most basic levels of detail, such as account values, individual holdings and transaction activity.
– A recent Morningstar Canada Stewardship report found that just two of 26 mutual fund companies get top marks in the report’s evaluation of how well mutual fund firms have aligned their interests with those of their unitholders.
– The key disincentive that continues to create a conflict between the interests of investment fund sellers and the interests of their clients is a tired, commission-based model that is pervasive in Canada, but increasingly being replaced worldwide by fee-based systems that essentially impose a fiduciary duty on financial advisors.
– Sales of low-cost exchange-traded funds, including actively managed varieties, are growing at a double-digit pace.
– In a low-return, volatile market environment, investors are seeking greater transparency on fees and the performance of their account. The mutual fund sector faces hostility as it attempts to push against the headwinds of reform. But failure to address market needs will ultimately lead to loss of market share.
– A recent staff notice from the Ontario Securities Commission found that many investment fund managers are preparing marketing materials with information that is misleading or contains unsubstantiated claims. For example, some fund managers use terms such as “best”, “exceptional” or “leading” to describe the performance of their investment funds without also including evidence to support these claims.
– A new study by noted investment advisor Harold Evensky should cause the industry to be worried. An analysis of 20 years of U.S. mutual fund performance results, during both up and down markets, and in both good economic times and recessions, shows that there is no decided advantage in using actively managed mutual funds, especially when costs are taken into consideration.
The mutual fund sector has to demonstrate that its approaches can beat the market, and thus are worth the payment of additional management fees. Billions of dollars in research expenses, sales and marketing expenses are at stake. If the sector doesn’t embrace change, it runs the risk of having the same fate as the dinosaurs.
Ken Kivenko, P.Eng., is president of Kenmar Associates of Toronto.
© 2013 Investment Executive. All rights reserved.
Quebec to drop withdrawal limit for LIFs in 2025
Move will give clients more flexibility for retirement income and tax planning