Weekend Reading: Impact Of Banning Commissions Edition

Back in 2012, the Canadian Securities Administration (CSA) published a discussion paper and request for comment regarding the mutual fund industry fee structure in Canada. Areas of concern included:

1. Lack of understanding and control over fees
2. Potential conflicts of interest
3. Lack of alignment between adviser compensation and services
4. Limited options for do-it-yourself investors

Outcomes from this initiative includes the upcoming Phase 2 of the Client Relationship Model Project (CRM2), which calls for advisors to make certain disclosures about expenses directly to investors both at the time of the account opening and annually. While CRM2 is a positive step forward for investors, the CSA has yet to address the two other elephants in the room:

• Eliminating the payment of trailing commissions
• Imposing a best-interest or fiduciary duty of care, rather than the current and inferior “suitability” standard

Last year, the Ontario Securities Commission, acting on behalf of the CSA, commissioned the Brondesbury Group to review existing research on mutual funds compensation and evaluate whether the use of fee-based versus commission-based compensation changes the nature of advice and investment outcomes over the long term.

The long-awaited report was recently published and concluded that the development of new compensation policies should be considered. The report goes on to say:

All forms of compensation affect advice and outcomes. There is conclusive evidence that commission-based compensation creates problems that must be addressed. Fee-based compensation is likely a better alternative, but there is not enough evidence to state with certainty that it will lead to better long-term outcomes for investors. Evidence from academic research is sufficient to form several clear conclusions about investor impacts of compensation.

• Funds that pay commission underperform. Returns are lower than funds that don’t pay commission whether looking at raw, risk-adjusted or after-fee returns.
• Mutual fund distribution costs raise expenses and lower investment returns.
• Advisors push investors into riskier funds.
• Investors cannot easily assess what form of compensation is best for them and readily make sub-optimal choices.

I’ll have more on this comprehensive 81-page study in a future column.

Path to CFP certification

Yesterday I wrote the last of four tests to complete the FPSC-approved core curriculum education program (the first step in the path to CFP certification). Next up is the level 1 examination in financial planning, which I’m eligible to write in November. After successfully completing the exam, I can apply for the FPSC Level 1 Certification in Financial Planning, which is a new designation that recognizes the certificant’s ability to provide financial planning strategies and solutions to for clients who have less complex financial planning needs.

I’ll admit I’m glad to be finished with the core curriculum portion, which has been difficult to juggle alongside of my full-time job, managing two blogs, doing the odd freelance assignment, plus working with clients in my fee-only financial planning service.

This Week’s Recap

On Monday I argued that having multiple income streams is a better emergency fund for Millennials.

On Wednesday Marie wrote about retiring to another province.

And on Friday we continued our Financial Makeover series with a look at family who’s had to deal with a bad string of unexpected expenses.

Weekend Reading

Frugal Trader, the prominent Canadian personal finance blogger behind Million Dollar Journey, was featured in this Forbes article about how one couple climbed out of debt and became millionaires in their 30s.

Read the latest edition of Financial Literacy leader Jane Rooney’s newsletter here.

Speaking of literacy, Rob Carrick says it needs to tackle the ticking time bomb of our borrowing behaviour.

Want proof of our addiction to borrowing? Read this take on the national lust for home equity lines of credit.

John Robertson argues that most people are in no position to buy pre-construction houses.

Ben Carlson ponders these four questions, including thoughts on low rates, financial advice, the impact of robo-advisors.

Dan Wesley explores some ways to put your emergency savings to work.

Carl Richards looks at our propensity to judge the financial situation of others based on their consumption habits and concludes that our neighbour’s business isn’t our business.

Jason Zweig argues that mutual funds should reward investors for loyalty by reducing their commissions over time.

An interesting look at a 68-year-old who considered his ‘good genes’ – a 95-year-old father and 93-year-old mother – as reason enough to continue working in order to stretch his retirement savings.

Alan Whitton asks one of financial planning’s greatest mysteries, how long are you going to live?

Here are four unexpected events that can derail your retirement.

Michael James on Money wants you to test your debt savvy.

Adam Mayers looks at Hydro One and the pros and cons of automatic payment plans.

And finally, Kerry Taylor says it’s simple to get confused by what you’re paying in mutual fund fees.

Have a great weekend, everyone!