by Karin Mizgala MBA, CFP
There is a very interesting dialogue going on in the investment industry around the issue of mutual fund commissions and whether Canadian investors are getting the short end of the stick. The Canadian Securities Administrators (CSA) published a discussion paper that is the best summary I’ve ever seen about the mutual fund industry and advisor compensation.
Reading through the paper I’m reminded of 2 things: 1) the inner workings of the fund industry is very complicated – no wonder most people don’t understand how it works and 2. the current system does not work in the best interests of investors. This doesn’t mean that mutual funds are bad or that financial advisors that sell funds are scoundrels. It simply means that there’s something wrong with how mutual fund fees are charged and re-distributed.
To summarize as simply as I can, when you buy a mutual fund there is a fee (MER) that is charged within the fund that covers the management, marketing , distribution and administration of the fund. You don’t necessarily see this fee but in 2011 the average MER in Canada was 1.93%*. If you buy mutual funds sold through banks or advisors, a portion of this fee is paid by the mutual fund company to your advisor for providing financial advice. According the CSA report, approximately 50% of the MER is paid out to advisors.
One of the problems with this structure is that every client who purchases a mutual fund from an advisor pays for advice that they may or may not be getting. And since most clients don’t actually know how much they are paying their advisor, it’s pretty hard for them to assess if they are getting value for their money.
Reforms in both the UK and Australia recently include a ban on commissions and they have moved to a system where advisors are required to negotiate fees for advice directly with their clients and the cost of this advice is no longer embedded in the cost of buying a mutual fund. Since the fee will be more visible to clients, advisors will need to clearly outline what services they are providing and clients will be in a better position to evaluate the value of those services.
CSA is currently reviewing feedback from the public and industry on this issue to determine if regulatory responses are needed. In my view unless Canada follows the UK and Australia’s lead on banning advisor commissions, it’s not going far enough for the average Canadian investor.
Do you think mutual fund commissions should be banned? We’d love to hear your opinion!
*Investor Economics Insights 2012 Annual Industry review
Karin Mizgala is Money Coaches Canada’s CEO and resident “money shrink”.
Thanks for the clear and simple explanation Karin. Our view is that banning the commission structure would be a good start! Here’s the submission we made to the CSA- http://www.steadyhand.com/industry/2013/05/28/investor_roundtable_on_mutual_fund_fees/
As in many other areas, we, in Canada pay to many banking/investments and other fees. I am not an expert and this is why I will seek counsel from those who are supposed to assist you in the best of their abilities. Fee-based advisor are often recommended but it is not always the best or ideal solution when you have already engaged many of your resources with a financial institution.
Personally, I was happy and relieved to move to private banking. I have noticed great improvements and diversification in my portfolio. One reason that prompted me to move was that I did not feel that the personal advisor who had been assigned to take over my file after the last one left the company, was not working for me. I did not sense that as a client, which should be considered a privilege, I did not receive the answers to questions I was asking. I am very tenacious, and after making a few phone calls,asking for a change and indicating that moving from one institution to another was a very good possibility, I finally was given the time of day. I am happy to know that there might be hope with these new regulations although you feel those might be sufficient. A move to make things better is always better than no move at all.
As in many other areas, we, in Canada pay to many banking/investments and other fees. I am not an expert and this is why I will seek counsel from those who are supposed to assist you in the best of their abilities.
Fee-based advisor are often recommended but it is not always the best or ideal solution when you have already engaged many of your resources with a financial institution.
Personally, I was happy and relieved to move to private banking. I have noticed great improvements within my portfolio.
One reason that prompted me to move was that I did not feel that the personal advisor who had been assigned to take over my file after the last one left the company, was not working for me. I did not sense that as a client, which should be considered a privilege, I received the answers to questions I was asking. I am very tenacious, and after making a few phone calls, asking for a better solution and indicating that moving from one institution to another was a very good possibility, I finally was given the time of day. I am happy to know that there might be hope with these new regulations although you feel those might be sufficient. A move to make things better is always better than no move at all.
Great submission to CSA Chris. Will encourage our team to read it.