Weekend Reading: Banning Mutual Fund Commissions Edition

The Canadian Securities Administrators has for several years debated whether or not to ban embedded commissions from the sale of mutual funds. Activity ramped-up last year with the release of two reports from the Brondesbury Group and Dr. Douglas Cumming that looked at the nature of financial advice and whether commissions influence mutual fund sales. The conclusion was clear: advisors direct more investment dollars into funds that pay higher commissions – it’s a blatant conflict of interest.

In a consultation paper last month, the CSA acknowledged that “embedded commissions create inefficient markets and give rise to conflicts of interest.” It appears that a long-awaited commission ban is finally coming, but if it happens it will be implemented in phases over a 36-month period. Stay tuned, but this is a huge step toward protecting investors from an industry designed to look out for themselves and not the investors they serve.

Meanwhile, Advocis, a lobby group that represents financial advisors, is still trying to convince regulators and the general public that banning mutual fund commissions will somehow harm investors. Their main argument is that a commission ban will lead to an advice gap, where smaller investors – those with less than $100,000 in investible assets – won’t be able to afford or even access financial advice.

The argument falls flat because, in the current environment, these so called “smaller investors” aren’t being looked after anyway. They’re being “sold” mutual funds with some of the highest fees in the world. In a product-focused industry, these investors are not being offered financial advice such as setting up a financial plan that outlines attainable goals over the short and long term.

While it’s likely that a commission ban may force sales people at firms such as Edward Jones and Investors Group to leave the industry, those investors still have plenty of access and choice thanks to an upstart robo-advisor industry, one which arguably gives better advice and leads to better outcomes for these investors.

This Week’s Recap:

Cheers to Rob Carrick for leading his Carrick on Money column with a link to my post on how buying new cars and trucks are killing our finances. Thanks so much for the mention and support!

Jeers to Motley Fool Canada and contributor Will Ashworth for not linking to my article despite discussing it at length in the opening three paragraphs of a recent column. Don’t you know that links make the web go round?

How about a link, Will? Jeez…

On Monday I wrote that rant about our obsession with new vehicles and how I hope to save $50,000 over the next five years just by not having a car payment.

On Wednesday Marie concluded her financial planning for couples series with a look at estate planning for young couples.

Weekend Reading:

Why the long-term power of the tax free savings account has yet to be fully tapped.

Kerry Taylor is “On The Money” with this terrific explanation of why the TFSA is so misunderstood and misused:

On the flip-side we have the RRSP, which turns 60 this year. Jason Heath on why the RRSP is still as important as ever as a tax-planning and retirement savings tool:

“As top marginal tax rates have risen in recent years to well over 50 per cent in many provinces — specifically, in Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia and PEI — the RRSP is one of the most straightforward tax shelters for high-income employees.”

Speaking of tax planning and retirement, here are three strategies to help retirees generate reliable cash flow:

3 strategies to help retirees generate income

Rob Carrick says tighter regulation of the investment industry, while a good thing, may seriously stifle innovation for robo-advisors and online brokerages:

“Someone has to offer a sound, low-cost, welcoming platform for beginners and the low-net-worth segment. No, bank branches aren’t the answer. They too often act as sales centres for financial products.”

Speaking of where innovation clashes with regulation, robo-advisors are seeking permission to bypass a required phone call in the “know-your-client” process in favour of an online-only form.

A great interview with CFP Jason Heath on raising money-savvy kids.

Why are you always broke? Here are 15 things holding you back from being a multi-millionaire.

There’s a reason why, when choosing a mortgage term, I opt for the cheaper of the short-term fixed rate or the 5-year variable rate. When I renewed my mortgage last fall I went with a 2-year fixed rate at 2.19%. That’s because variable rate discounts were not very attractive at the time. Today, fixed rates have ticked up while variable rate discounts have come down to as low as 1.83%.

Finally, in praise of weird spending – a term coined by Des Odjick to describe those areas of your finances that stray away from the average household budget.

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  1. RK on February 5, 2017 at 9:12 am

    As somebody who works in the industry and with fee-based platforms, I can tell you this regulation will do very little. Investors will wind up paying the same amount for F-series mutual funds plus whatever fee advisors charge. There will still be conflicts of interests as firms may pay more or push proprietary products. Wholesalers will still exist and push their products in exchange for steak lunches and hockey tickets.

    I do find it curious that the study found that advisors recommend funds with higher commissions considering the vast majority of funds pay a 1% trailer. Unless we’re referring to recommending investments with a DSC (and 5% dealer commission paid up front)…but then again, why not just ban DSC, if anything?

    • Echo on February 5, 2017 at 10:17 am

      Hi RK, thanks for your comment. Dr. Cumming answers this question, among others, in this MoneySense article (and in the links within the article) I was surprised to see the average trailing commission was actually closer to 0.5% – perhaps due to bond funds and money-market funds having lower trailers?


      • Echo on February 5, 2017 at 10:24 am

        I followed the link trail and found the answer:

        Q4: I believe I heard Professor Cummings say that the average trailer fee in the entire data set was 0.30%. Is that correct? That strikes me as odd as the average bond fund pays a trailer of about 0.50% and the average equity fund and balanced fund (in fact the vast majority of them) pays a standard trailer of 1.00%. What is skewing the data so drastically downward? Any money market funds should probably have been eliminated because these are simply a parking spot for cash in volatile markets. How was the data scrubbed so it is relevant to the debate?

        A4: Yes, the average trailing commission for the entire dataset – for all purchase options, front end, no load, DSC and including those that pay no trailing commissions, and all fund asset classes was 0.3%.

        If you look at the summary stats by purchase option (which are still reported as aggregates across all asset classes) on pages 74 -75, you will see that the trailing commissions reported are representative of industry norms.

        As for removing any particular asset class, this would not be appropriate and we would not want to be accused of introducing bias in the dataset. Instead, there were controls for fund type by broad asset class, including for money market funds.

        • RK on February 5, 2017 at 3:06 pm

          Sorry I didn’t see the initial link but I think my point prevails here.

          Funds sold with a DSC pay a 5% commission to the dealer up front from the fund company and funds that remain as DSC only pay a 0.5%. (Freed up unit usually transferred to Front End fund version every year increasing the trail to 1%) This may be why the average trailer is lower than 1%….but 0.3% means there must be money market funds skewing the data.

          So…are we saying advisors are providing “biased” advice by recommending equity and balanced funds over bond and money market funds? Nonsense…

          The CSA is completely clueless here.

  2. Malcolm Palmer on February 5, 2017 at 1:10 pm

    I want to see where this has been tried and how well it works. In other words, which countries have tried this and what percent of their population is invested in their personal retirement plans. My experience is most people don’t want to pay out of pocket to purchase investments and they will swing towards those investments that don’t appear to charge, such as GIC’s, which have an implicit 9% MER. With my own clients, if they are invested in Tangerine or TD e-Trade Index funds, etc. I tell them to stay where they are.

  3. Robert Kazan on February 5, 2017 at 3:11 pm

    @Malcolm Palmer

    You are exactly right. Is CRM2 not enough for investors to make educated decisions? I think the most important thing is disclosure and every compensation structure has its pros and cons.

    The investor’s biggest enemy is usually themselves…and while there are some bad/shady advisors out there, these changes do nothing to fix the problems.

  4. Echo on February 5, 2017 at 4:17 pm

    @RK – The reports come from Dr. Cumming and from the Brondesbury Group (not the CSA). As Dr. Cumming notes at the end of his MoneySense article:

    “We appreciate that the industry has a substantial financial interest in keeping trailer fees in Canada, with over $5 billion per year charged to Canadian investors. My co-authors and I have no financial stake one way or the other. We simply report what the data indicate. Blame the data. Please don’t shoot the messenger.”

    • RK on February 6, 2017 at 11:35 am

      The CSA and this blog, for that matter, are certainly using reports like that from Dr. Cumming and the Brondesbury Group to prove the point that we SHOULD be banning trailing commissions.

  5. Steve Bridge on February 7, 2017 at 9:43 am

    Great discussion, Robb, keep it up! Canadians are getting taken to the cleaners to the tune of hundreds of thousands of dollars.

    I really like using the mutual fund fee calculator on the OSC’s website getsmarteraboutmoney.ca. Showing people how much they can save with a low-fee index fund is very valuable.


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