A study conducted for the Canadian Securities Administrators (CSA) has found that there is enough evidence to justify either banning or limiting commissions paid to mutual fund advisors.
Acting on behalf of the Canadian Securities Administrators, the Ontario Securities Commission hired The Brondesbury Group (TBG) to review existing research on mutual funds compensation.
TBG says that there is enough academic research on the subject to draw several clear conclusions. The following four points are direct quotes from the study:
- 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 suboptimal choices
The report also says that in jurisdictions where commissions have been either capped or eliminated entirely, there is evidence that advisors recommend lower cost products which typically have better returns due to lower expenses.
TBG does warn that advisory fees could rise if commissions are removed, and that there may also be new or increased administrative fees, higher costs on margin accounts, and lower payments on cash balances.
If commissions were to be banned, one of the outcomes predicted by the study is that there would be an increased rate of retirement among older advisors, especially those with assets under management that are below the median amount. Another prediction is that younger investors would migrate to technology-assisted brokerage services.
Ultimately, TBG suggests that "the evidence on compensation is conclusive enough to serve as a basis for policy formulation."
In a prefatory note, the regulators made a point of reminding readers that the opinions expressed in the report are those of the authors and do not necessarily represent those of the CSA. "This research, together with the comments received during the previous consultation period and the forthcoming research into whether tied forms of compensation influence mutual fund sales, are intended to be among the inputs that will be factored into the CSA’s determination of whether to effect certain policy changes," reads the introduction.