Overhaul of mutual fund fees not as sweeping as some would like

Deferred Sales Charges (DSC) on mutual funds are going to be eliminated in Canada but recommendations released today by securities regulators did not go so far as to implement an outright ban of trailer commissions (aka trailer fees, also referred to as embedded compensation.)

The Canadian Securities Administrators (CSA) also released proposals regarding rules about what advice or products are in the “best interest” of financial consumers.

You can find a full summary in this article that appeared today in the Globe & Mail. (The full link may only be available to G&M subscribers, depending on how many free views readers have previously accessed). Rob Carrick also has a column on the topic titled It just became clear we’ll never see an investment industry where clients must come first. Well, we’ll see. Over at the Financial Post, Barbara Schecter reports OSC drops push for adviser standard.

Big win for industry

For more of an industry perspective, there is a full report here at Advisor.ca. And the industry’s newspaper, Investment Executive, headlined its coverage as “a big win for the industry.”

One of the sources cited in both G&M articles is John De Goey, an investment adviser and author, who also sent this email to the Hub expressing his disappointment in the decisions:

“This is shameful on the part of the CSA.  It has been almost 15 years since Julia Dublin’s Fair Dealing Model drew attention to the concern of bias caused by embedded commissions.”  He also offered these four observations:

• The primary concern is advisor bias as caused by embedded compensation, and there’s nothing here to address that
• Does not allow for “product meritocracy”
• Does not address how the trailing commission on equities is double the trailing commission on income (which creates obvious, massive, self-evident advisor bias)
• Does nothing to address the discrepancy between ETFs and mutual funds.  Advisor’s preferred business model should never drive product recommendations

Vanguard says industry will organically evolve away from embedded compensation

However, Vanguard Investments Canada Inc. managing director Atul Tiwari said Vanguard is “encouraged by some of the proposals from the CSA. Although there will not be a ban on embedded commissions, we believe that the Canadian market, like other regions around the world, will organically evolve away from it. The CSA has made clear that suitability determinations will need to be in the best interests of clients. This will likely accelerate the move that we are already seeing in advisors going from commission-based to fee-based models. We support that trend as providing superior fee transparency and enhancing the use of low cost products to give clients better long term returns. Vanguard will continue to champion the interests of Canadian investors with more low-cost and high-quality product options.”

And finally, my take on this at the Motley Fool

(Added on Friday afternoon): You can find my own take on this development in my monthly blog at Motley Fool Canada. Click on the highlighted headline here: New mutual fund advice guidelines underwhelm advocates for Consumer-Investors.