MUTUAL FUND MERs AND COST TO CUSTOMER IN CANADA – Investor Economics for IFIC.

The Investor Economics report, in between the lines, provides some support for removing embedded mutual fund fees and a move towards best interests standards.  And here are my brief comments:


“Distribution channels that provide access to mutual funds at lower than industry average cost are gaining share over channels that have been slower to adapt to the changing demands of the investor. At the same time, manufacturers that have failed to offer investors the opportunity to lower their CoO, other than through the size of their portfolio, have been challenged to retain the interests of advisors and investors alike.”

What does the above suggest? It suggests that those companies that fail to respond to changes in the competitive landscape suffer, and that there is a demand amongst advisors on behalf of consumers for access to lower cost allocation vehicles.   Change is positive for those that adapt and negative for those that do not.  There are no comments in the report that a move to lower cost funds has limited access to products and financial advice.

The load-waived approach to new sales is in line with the overarching trend towards greater emphasis by distributors on recurring, fee-based—as opposed to transaction based— revenues.

The zero front-end load model is now firmly entrenched. Based on sample of data received from eight companies representing 45% of front-end load fund gross sales in 2011, our analysis suggests that the majority of sales into front-end load options are now load-waived. In 2011, 98% of sales of front-end load funds did not incur sales commissions.

What does the above suggest?  It suggests that the industry is already moving towards a fee based model, a model which could more easily, than argued by the industry, adapt to a removal of embedded commissions in exchange for fees agreed in advance.   The trend is your friend!  Moreover, if fee based correlates with advice based, we also have further support for the industry moving well outside the transaction driven model of current regulation and into the best interests realm assessed by the recent CSA consultation.

Understandably, when the cost of advice is uncoupled from the provision of investment management services, the MER will be lower. This is the case with F-series funds although, to date, it is generally the case that the combination of the MER and the advice fee negotiated between the advisor and the investor has not resulted in discernable savings to the investor.

And the above?  Well, number 1 it suggests that you could separate, unbundle the fee, and investors may not be as resistant to paying a fee as many in the industry think.  Otherwise, you may have seen a fall in unbundled fees, which is not the case.  Obviously this data says nothing about how much more effort needs to be put into services to keep fees level in the unbundled scenario, but there is nothing overt, from the report, to be worried about.

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