OSC’s Mutual Fund Fees discussion paper–a selection of industry comments against…..

I was hoping to catalogue a few more of these, but here are a selection of outtakes from some of the many submissions on the topic:

Federation of Mutual Fund Dealers.

“What is the real problem or problems that we are trying to solve? It is not clear to us what, if any problem(s) the Canadian Securities Administrators (“CSA”) is trying to solve in the release of this Paper”

Investment Industry Association of Canada: their submission basically states that disclosure is enough and that the new CRM and POS initiatives provide sufficient disclosure but ignore all other issues.

Blackrock Asset Management:

“BlackRock would support an initiative to mandate the renaming of the term “trailing commission”….We would therefore support replacing the term “trailing commission” with a less neutral and nebulous one such as “ongoing advice fee” or “ongoing payment to advisor”.

“BlackRock believes that individual investors, when armed with effective disclosure, are ultimately the best arbiters of whether they are getting value for the advice received.

“As investor demand for DIY and other types of minimal and no trailing commission investment products increases, mutual fund manufacturers will continue to respond in kind by making these products more readily available”

“the most effective way of addressing the potential compensation conflicts of interest between advisors and clients is not through bans or prohibitions on trailing commissions, but rather though informed investor choice predicated on complete and comprehensible disclosure:”


“Embedded compensation in the form of trailing commissions on mutual funds makes it possible for thousands of financial advisors to provide financial advice to millions of Canadians. Many of these consumers access the advice of financial advisors precisely because embedded compensation makes investing small amounts in mutual funds much more accessible than the alternative of investing through a fee-based investment account and paying separately for advice”

“We believe it would be an error to treat trailing commissions as compensation that is specifically provided in exchange for specified ongoing future services.”

Given what is known about the tremendous value that consumers derive from financial advice and from working with a financial advisor on an ongoing basis, we believe it would be a mistake to require all mutual funds to make a low-cost ‘execution-only’ series or class of securities available for direct purchase by investors”

“the actual harms that flow from conflicts of interest due to embedded compensation are insubstantial, while the harm to consumers that will result from eliminating embedded compensation on mutual funds is substantial”

PMAC: for a statutory fiduciary duty, but not for abolishing conflicts of interests, for allowing investors to choose an appropriate level of service but not for specifying what those costs are”.

“We note that our membership is primarily comprised of portfolio managers and fund managers who are advisors to and managers of pooled funds and/or mutual funds”

We have concerns with the impact that eliminating the payment of trailing fees by mutual fund manufacturers could have on investor choice and access to advice. Mandating a fee for service based model for all investors may prove to be a disincentive to investors and impact the accessibility of advice. It could also create potential distortions between mutual fund securities and other products (e.g. segregated funds) that could lead investors into misleading price comparisons between the two.

“we strongly believe that advisors and dealers who perform similar advising activities should be held to the same standard of conduct. PMAC supports the implementation of a statutory fiduciary duty across all jurisdictions in Canada that applies equally to advisors ……and dealers who are providing investment advice.”

“If investors have clear, transparent information on the costs of investing, they can choose the appropriate level of service (and fee model) to suit their needs.”

“Re Advisor services to be specified and provided in exchange for trailing commissions…”Our main concern with this proposal is that it may be difficult to define and put parameters around what services are being offered along with the more fundamental issue of how to determine whether an agreed upon service has been me”


“AGF submits that mutual fund manufacturers do not in fact set advisor compensation at all. Mutual fund manufacturers have established the total commission payments (which include advisor compensation) for their funds in direct response to dealers’ pricing policies; such policies having evolved through the dealers over time. Trailing commissions are paid by mutual fund manufacturers (including AGF) to the dealer firm. The trailing commissions are then used by the dealer to pay for a number of dealer functions, including (but not limited to) the compensation of advisors. As a result, there really is not a conflict of interest that needs to be addressed by the regulator with regard to this topic as it relates to mutual fund manufacturers.”


“It is completely unworkable for many fund managers to offer their funds directly to investors…….”

“Given the choice, we believe that Canadians will not be able to pay for the true cost of advice

“….fees are subsidized by larger investors in pools who pay higher fees…smaller investors serviced by financial advisors because in total their fees allow them to service smaller investors…”

“The real issue…..lack of understanding of the costs of mutual fund investments and how financial advisors are paid”

unlike several international jurisdictions, the CSA has worked hard over recent years to enhance cost disclosure at point of sale and through client level reporting,….initiatives should be given time to run its course…”

investors would now have to shoulder the burden of having to negotiate a fee directly with their advisor…embedded fees provide upper limit to the fees”


“Best practices would suggest that advisor compensation should be transparent and the investor should be informed of what they pay their advisor and how they pay them. The CSA Point of Sale project and the Client Relationship Model Project, phase 2 should help in this regard. We trust that once investors have clear and detailed disclosure, the marketplace will make the appropriate changes. As the result, the CETFA recommends that the CSA allow sufficient time for the implementation of these initiatives to assess their impacts before deciding to proceed with further regulatory changes”


“we would like to correct the misconception in the Paper that execution-only brokerages should be entitled only to a smaller trailing commission than full-service brokerages because they do not provide advisory services.”

“…CSA…..regulatory initiatives,….point of sale disclosure (“POS”) and the client relationship model (“CRM”)……should increase investor awareness of the costs of investing in mutual funds and address many of the CSA’s concerns discussed in the Paper.”

“We believe that all investors can benefit from professional financial advisory services and do not believe that regulators should take actions that could limit cost-effective access to advice for Canadians.”

“Prescribing the terms of the commercial arrangements between investors, dealers and manufacturers may limit the ability of the industry to adapt to the changing preferences of investors and limit the ability of investors to decide what business model and what fee structure best suits their own individual needs. We do not believe that the CSA should implement any proposals that would limit investor choice.”

We agree that investors who purchase mutual funds through execution-only brokerages should be provided with information about trailing commissions so they are able to make informed investment decisions and consider the value of the services they receive. There is no need for the CSA to take the additional step of prescribing the trailing commission an execution-only brokerage is entitled to receive for providing services to investors. If the CSA were to cap the trailing commissions that could be paid to execution-only brokerages, this could restrict these brokerages’ ability to continue to provide the same level service to mutual fund investors.

“CIBC supports the CSA’s efforts to increase investors’ awareness and understanding of the costs of owning mutual funds so that they can make informed investment decisions.”


“trailing commissions pay for more than simply investment advice….dealer services, provision and upkeep of online tools, product information, economic and market research, tax documentation and technology infrastructure..”

“We are very supportive of initiatives that would enhance Canadian investors understanding of the financial structure of their investments.”

“Canada is a leader in searching for ways to deliver clear, understandable information to mutual fund investors.”


Most investors do not have the time or knowledge to research various investment options, including direct investments in stocks and bonds, and to build a sound portfolio. …..

…there is much competition for “high net worth” investors… This has caused fees charged to these investors to decline……. At the lower end of the wealth spectrum….clients do not have much bargaining power but it is simply wrong to say that they have none.

….the issue is not that fees are too high, it is that those who question mutual fund fee models seem to think that advisors should provide extensive service to their clients and not get paid for it.

….a low net worth client pays only 1% …..with $50,000 invested in mutual funds….. The trailing commission on that investment is $500 per year…..there is virtually no difference in what a dealer does for a $50,000 client than for a $150,000 client …. $500 paid to the dealer (of which the advisor retains less than $250 typically)… many advisors provide a whole range of financial planning services for that fee…… For full financial planning, the total hours spent among the advisor and the team on the client will be in excess of 20 hours per year. At $250, that works out to an hourly rate of $12.50.

Our concern is not that dealers and advisors make enough money; rather, our concern is that if they do not make what they perceive to be enough money, they will exit the business and it will be more difficult for investors to obtain good financial advice..

…integration of manufacturing and distribution is the single greatest conflict of interest in the mutual fund industry…..This conflict manifests itself in two ways:

..when an independent fund company experiences a period of negative performance, it is closely followed by a period of net redemptions…..excellent incentive for the fund company…..to make changes that ought to benefit their retail investor clients.

There are many incentives for financial advisors who work for non-independent dealers to retain client assets with the investment management affiliate of their dealer (including compensation and licensing sponsorship to name a couple)…..their incentive to improve is less than that of an independent fund company. It is the retail client who suffers.

We understand that dealers construct “recommended lists” of mutual fund investments for their clients and sales of recommended list funds generate a higher grid payout than funds not on the list and that third party funds do appear on recommended lists. However, we suspect that all proprietary funds are also on the list and this enables the dealer to legally evade subsection 4.1(1).

…the conclusion that understanding the investment style, discipline and track record of the investment fund is ultimately more important than cost.

…the IEF Study…………the only conclusions that can be drawn…. is that most investors do not care about the costs of investing and those that do care about the costs of investing do not view it as a decisive factor.

…….leads us to the conclusion that the CSA believes cost should be the primary factor to an investor in making an investment decision. We do not believe that the CSA is qualified to make that assertion and we do not believe it is appropriate for a regulator to mandate how investors make investment decisions.

Notwithstanding the CSA’s assertion that an investor has little control or influence over an advisor’s compensation (which on its face is an absurd statement since the investor can choose not to deal with the advisor), we note that advisor compensation for a product is set at product inception. The investor does have a say, therefore, at whatever point they are making the investment decision: they do not have to buy the product.

…how do we encourage Canadians to look after themselves? It seems to us that the evidence shows that we need to encourage more and better financial advice, not less.

…. only 11% of transactions (measured by dollar amount) are into DSC. We also note that our low load option, which subjects the investor to a redemption fee during the first two years, pays a 1% commission and offers the same trailing commission as front-end yet garners slightly more than 10% of the transactions and assets….. some advisors rely on the DSC commission to finance the ability to provide holistic financial planning advice for their clients.

…..We have had discussions with discount brokers to create a low trail series D (25 bps trail to cover the discount broker’s legitimate costs) but such has been rejected by the discount brokers. …..the bank-owned discount brokers will not agree to this and such broker’s dominate the discount channel.

We believe embedded compensation benefits investors….our belief… will be well tested with the implementation of the Transparency Initiative….
Further reforms until the effects….are known simply do not make sense…..opponents of unbundling …have raised… concerns about the impact of these reforms on the actual investment performance and experience of retail investors.

CI Investments:

Canada has had a greater focus on disclosure than the other jurisdictions noted in the report. A great deal of progress has been made…dating from the 1995 release of ….Stromberg’s report “Regulatory Strategies for the Mid-90′s – Recommendations for Regulating Investment Funds in Canada” to….the “Point of Sale Disclosure for Mutual Funds” ……and the CSA amendment to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations (Cost Disclosure, Performance Reporting and Client Statements) (“NI 31-103”)…… These initiatives have significantly enhanced disclosure and set us apart from the other jurisdictions in the report where current regulatory initiatives seem to be aimed at closing the gaps Canada has already dealt with.

Trailer fees have not materially changed in the past two decades indicating investor satisfaction with the cost of advice they are receiving. It would be a slippery slope for the CSA to begin regulating business models that are naturally market driven. A free, open and competitive market is what dictates prices and additional regulation may not be necessary at this point.

Investment Planning Counsel:

“Most investors have preferred to pay indirectly for advice and even if they mature to the point of being willing to pay directly for such advice, time is no longer their ally in meeting their financial goals”.

“Importantly, manufacturer does not determine the level of service advisors are to provide. Instead the dealer does.”

Instead the issue (THE DIY issue) should be left to the self regulatory organisations in Canada that oversee the dealers. These SROs are able to deal with any issues that exist in this regard.

Mutual fund sponsors structure their offerings to provide for the payment of commissions to dealers. In turn those dealers enter into arrangements with their advisors….

..the proposal seems to be based on the faulty premise that a fee only model for advisor compensation would eliminate a source of potential conflict of interest through increased transparency. In fact, the opposite is true. In a fee based model the information the investor receives is actually reduced, since investors are placed in the position of having to negotiate advisory fees with dealers directly and independently….environment governing the distribution of mutual funds….provides for comprehensive disclosure to the public and investors of all fees and commissions through the simplified prospectus, Fund Facts and Management Report on Fund Performance.

We would add that investors do not see a cost advantage in this model either

TD Bank Financial Group

We support the principles of investor protection and fairness, and we also believe that Canadian investors are best served by a fee structure that furthers competition and investor choice alongside these principles.

In most cases, clear disclosure mitigates potential conflicts of interest; and a mutual fund fee structure based on the principles of investor protection and fairness as well as competition and investor choice, produces fair beneficial outcomes for investors.

In cases where industry regulation is required to serve a public interest, especially as it pertains to market failures, the response should focus on enhancing transparency through clear disclosure.  POS and CRM are excellent examples of this approach.

Competition Bureau quote “The only time it is desirable to supplant competition by regulation is when markets are not functioning as well as they should be and when the benefits of regulation demonstrably outweigh the benefits of competition alone.”

The fee paper indicates that the fundamental market failure mutual fund fee models produce is conflicts of interest, which may not be effectively mitigated due to information asymmetry.  If information asymmetry is the source of market failures which are at issue, we consider the appropriate regulatory response to be  one focused on enhancing transparency through clear disclosure.

A mutual fund market that encourages both competition and investor protection provides investors with an array of fee structures and investors may select the option that works best for their individual circumstances and needs….

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