{"id":632,"date":"2016-07-06T11:44:51","date_gmt":"2016-07-06T18:44:51","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=632"},"modified":"2016-07-06T11:44:51","modified_gmt":"2016-07-06T18:44:51","slug":"more-big-changes-coming-for-canadian-investors-who-will-be-the-winners-and-losers","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/more-big-changes-coming-for-canadian-investors-who-will-be-the-winners-and-losers\/","title":{"rendered":"More big changes coming for Canadian investors – who will be the winners and losers?"},"content":{"rendered":"

\"balance-3-1237355-640x480\"<\/a><\/p>\n

Transparency, education and competition should drive better outcomes for investors. \u00a0Recent enhancements put in place by the Canadian Securities Administrators (CSA) have sought to better align the interests of investors and the investment industry that serves them. \u00a0Initiatives like the Customer Relationship Model are designed to increase\u00a0transparency and to help investors make more\u00a0informed decisions about the\u00a0kind of advisor with whom they work<\/span><\/span>\u00a0and the type of products in which they invest. \u00a0The idea is t<\/span>hat with full disclosure, investors will\u00a0be armed with the right information to make better\u00a0decisions and protect themselves from bad products and sales practices.<\/p>\n

So, we were\u00a0somewhat surprised by last week’s announcement by the CSA that indicates\u00a0they will be moving ahead, subject to consultation with investors and the industry, with banning embedded trailing commissions on mutual fund sales. \u00a0It seems even the regulators have lost faith in transparency to properly do the job of protecting investors. \u00a0This represents a significant\u00a0next step in a progression of possible measures, one that regulators in countries like the UK and Australia have already taken.<\/p>\n

Let’s dig into the reasons why regulators might be\u00a0concerned. \u00a0 Mutual fund fees in Canada are among the highest in the developed world. \u00a0This is partly because a portion of the management expense ratio (MER)\u00a0on many mutual funds is a commission paid to the person or institution selling\u00a0those mutual funds. \u00a0This embedded “trailing” payment is paid not just as an upfront sales commission but every single year that the investor owns the fund, supposedly to compensate the sales person or advisor for the ongoing service they provide. \u00a0The catch is that it’s paid no matter what and many people aren’t even aware that any commissions are being paid.<\/p>\n

To be clear, the thing that irks the regulator is not that advisors are getting paid for what they do.\u00a0 The concern is more the embedded\/hidden nature of the commissions and the incentives that influence advisors to recommend certain products over others. \u00a0For example, a mutual fund with a 2.5% expense ratio (yes, high but not uncommon) might typically pay a trailing commission of 1% per year to the mutual fund salesman. \u00a0Now if there were a lower cost mutual fund or other solution that might be better for the end investor but didn’t pay a commission, what do you think the mutual fund salesperson would recommend? \u00a0Without the trailing commission, there is no incentive for the salesperson to recommend the fund because commissions are how he or she gets paid. \u00a0Remove the incentive, or lack thereof, and you free the advisor\/salesperson to recommended either fund. \u00a0With a direct compensation model advisors\u00a0could be paid the same but would have the freedom to recommend a wider variety of products. \u00a0Now there might be a little more scrutiny placed on what that advisor actually does for his or her 1% if\u00a0it’s not embedded in the overall expense ratio, but that scrutiny would also\u00a0be better for\u00a0the end investor.<\/p>\n

So what is the likely outcome? \u00a0We suspect that payments to advisors probably won’t change that much, at least the ones that can justify their compensation with good service. \u00a0It’s therefore not the 1% of the 2.5% expense ratio that will be under threat. \u00a0It’s the other 1.5% that goes to the fund manager that will come under pressure. \u00a0Usually it’s actively managed funds that have high expense ratios like 1.5% before commissions are added. \u00a0Passive index funds and exchange traded funds tend to have much lower expense ratios than active funds, some as low as 1\/20th of 1%. \u00a0The evidence is very compelling\u00a0–\u00a0after fees are taken into account, the vast majority of active funds underperform passive index funds, especially over longer periods of time. \u00a0However passive index funds and ETF’s rarely pay\u00a0trailing commissions so there’s no incentive for commission-based advisors to offer them to their clients.<\/span><\/p>\n

If incentives are changed so\u00a0advisors are\u00a0free to offer a broader range of solutions, we suspect the expensive, underperforming active funds will come under much greater threat. \u00a0This is exactly what has been happening in the US as companies like Vanguard who offer very low cost passive index mutual funds and ETFs continue to take assets away from the big actively-managed mutual fund complexes. \u00a0The trend hasn’t been the same in Canada but this new regulation could lead to massive changes, a tipping point if you will.<\/p>\n

In the past we’ve written about this issue and have always hoped that competition driven by transparency and investor education would lead to a better result for Canadian investors. \u00a0The regulators have clearly come to the conclusion that banning certain sales practices will\u00a0h<\/span>ave a better chance of success or will get us there faster. \u00a0Maybe they’re right. \u00a0Forcing change will likely bring near term disruption\u00a0to the industry and investors, a<\/span><\/span>nd that is why the CSA is engaging in extensive consultation before they consider any specific rule changes. \u00a0 Hopefully all parties\u00a0will be in a better place after things shake out.<\/p>\n

Who knows, maybe a few years from now we won’t feel the need to have “Fee-Only” as part of our name.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Transparency, education and competition should drive better outcomes for investors. \u00a0Recent enhancements put in place by the Canadian Securities Administrators (CSA) have sought to better align the interests of investors and the investment industry that serves them. \u00a0Initiatives like the Customer Relationship Model are designed to increase\u00a0transparency and to help investors make more\u00a0informed decisions about […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,7,14,12,13],"tags":[],"class_list":["post-632","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-graham-bodel-posts","category-investment-industry-issues","category-passive-vs-active-investing","category-regulation"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/632","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=632"}],"version-history":[{"count":4,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/632\/revisions"}],"predecessor-version":[{"id":637,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/632\/revisions\/637"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=632"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=632"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=632"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}