Many studies have deemed Canadian mutual fund fees among the highest in the world. In a comment paper released yesterday, the Canadian Securities Administrators say they want to tackle that problem.
“The CSA have to date focused their regulatory efforts on enhancing transparency of fund fees for investors, including the cost of embedded trailing commissions, through such initiatives as the Point of Sale disclosure project and Client Relationship Model project,” the regulators say in the paper Mutual Fund Fees.
“We are now examining whether the current mutual fund fee structure raises investor protection concerns that require additional regulatory action.”
Read: Prepare to be squeezed
The paper states in 2011, mutual fund manufacturers paid an estimated $4.6 billion in trailing commissions to advisors and their firms, representing 34% of total revenue from MERs for that year, $13.4 billion.
The regulators cite research showing “mutual fund investors tend not to review disclosure documents for cost information and instead primarily rely on advisors to tell them about costs,” but add “further research indicates that many advisors do not tell their clients about costs.”
Further, advisors typically earn about 64% of their compensation from trailer fees — a proportion that’s almost tripled since 1996, when those commissions accounted for slightly more than 25% of compensation.
The CSA are concerned trailers constitute a conflict-of-interest issue. In the case of advisors, there’s “no evidence to substantiate” that investors can expect an increase in services and advice if their fund’s trailer fees rise. And in the case of mutual fund manufacturers, using fund assets to increase trailer fees would encourage additional fund sales. This benefits the manufacturer rather than the fund itself, the paper states.
The paper doesn’t propose a solution and instead requests comments before April 12, 2013, to:
Ontario Securities Commission
20 Queen Street West 19th Floor, Box 55
Toronto, Ontario M5H 3S8