Canadian investors cannot be adequately protected while sales commissions and incentives are being paid to their financial advisors.
The latest salvo against high mutual fund fees was fired this week by investment regulators. In a paper discussing embedded commissions in investment funds, the Canadian Securities Administrators has proposed abolishing these and other embedded commissions, the most notorious being trailer fees that reward advisors for loyalty to a product they sell. The CSA says, this would result in a significant reduction in mutual funds’ management expense ratios, the annual fees that are included in advertised total returns.
Further, the report says that, eliminating the embedded commissions will start to encourage investment advisors to sell funds that make the most money for their clients, as opposed to those that put the most money in their own pockets.
Trailer fees and other hidden sales commissions are paid by mutual funds to advisors as a powerful incentive to advisors to keep clients’ money in those funds. The obvious result is it prompts many advisors to put their clients into products that may not be appropriate to their investment needs.
The mutual fund industry (IFIC) pre-empted the CSA report a day earlier by issuing a statement condemning any attempt to eliminate embedded commissions, claiming there is insufficient evidence to justify a ban. It sided with the opinions of two advisors’ industry groups which oppose a single ‘client best interests’ standard.
And later in the week, Advocis, a major advisor association, said an embedded-commissions ban would reduce Canadians’ access to financial services because it would likely prompt many advisors to leave the industry. It also said this would force middle-class investors to “choose between paying higher fees and foregoing investment advice.” This argument ignores the conflict-of interest that is inherent in embedded commissions.
Meantime, the Portfolio Management Association of Canada (PMAC), said it supports a ban on embedded commissions. This isn’t surprising, though, as PMs are paid on an assets-under-management basis and have a ‘Best Interests’ duty to their clients.
I believe that advisors selling mutual funds can only act in their client’s best interests if embedded commissions are outlawed. Canadian investors cannot be adequately protected while sales commissions and incentives are being paid to their financial advisors.