Mutual fund industry representatives from Canada and the United States have urged restraint before moving ahead with the kinds of regulatory reforms recently undertaken in the United Kingdom and Australia.“We need to proceed with caution before importing solutions that have been shaped by non-Canadian legal, business and cultural frameworks,” Glen Gowland, chair of the Investment Funds Institute of Canada (IFIC) told the organization’s annual conference in Toronto.
Gowland, who is also managing director & head, Canadian Wealth Management Advisory at Scotiabank, said the two major issues that are moving around the world – banning commissions and introducing a statutory best interest or fiduciary duty– have to be taken in context in terms of why they were brought in.
As well, Canadian regulators have already proposed further stages in implementing Fund Facts in addition to the Client Relationship Model amendments, which, among other things, require dealers to give clients annual reports outlining how much their dealer was paid in dollars and how clients’ investments fared in both percentages and dollars.
Mutual funds, said Gowland, have become a major part of the Canadian investor’s financial future and are partial to using financial advisors.
While other jurisdictions have moved away from embedded commissions to a fee-based model, he repeated IFIC’s view that doing so might mean those with less money to save won’t be able to afford an advisor.
He said the industry appreciates discussion papers coming from the Canadian Securities Administrators (CSA) on the two issues, but added investor choice needs to be preserved in the range of channels they can currently access.
“Therefore, any initiatives that might flow from the recent CSA discussion papers need very careful consideration – particularly on the question as to whether they will create a consistent experience for consumers of financial products and services.”
The United States is also keeping an eye on what’s happening in other jurisdictions, but it is waiting to see how things shake out first in the U.K. and Australia, said Bob Grohowski, senior counsel, securities regulation with Washington-based Investment Company Institute.
“We are at a different place in the U.S. in terms of the evolution of regulatory change. A lot of the same thoughts are going through [our] regulators’ minds, but we are not where the UK and Australia are yet.”
Almost half of investors in the U.S. use more than one channel to purchase their mutual funds, but he said there are four basic channels: employer-sponsored retirement plans, directly through fund companies, through fund “supermarkets” or discount brokers, and through investment advisors.
And while the do-it-yourself market in the U.S. has often been touted as large, it only makes up a two per cent share of the pie, he said.
In the U.S., while some advisors are moving to the embedded commission model, there is some uncertainty as to how it will affect clients, he said.
“There certainly seems to be a regulatory belief and a sentiment among many consumer advocates that direct expenses are inherently better than indirect [embedded] expenses,” said Grohowski. “But what we’re seeing with our data is that that’s not necessarily true from an investor experience. What it means is that intermediaries will still be compensated but they will be compensated by other means. But at the end of the day, the total investment costs may very well be going up, not down.”
Currently, the U.S. Securities and Exchange Commission is examining how the advisory industry pays mutual fund distributors. It is also considering fiduciary duties for brokers, while the U.S. Department of Labor is thinking about expanding which financial professionals would be viewed as providing investment advice to retirement plans and retirement plan investors, making them fiduciaries under the Employee Retirement Income Security Act.
John Brogden, chief executive officer of the Financial Services Council in Australia, said the industry in his country has gone through traumatic change because of its rule changes – and expects more to come.
He said Australia, which banned commissions effective July 1, 2013, may have nixed one problem, but failed to move ahead on another – at least for now.
“What the government actually wanted was to reduce the level of conflict of advice and I think that will be achieved,” said Brogden. “But as for increasing the level of advice, these reforms, at this stage, will simply not do that.” (For more on the embedded commissions issue, see Banning embedded commissions: The UK sees uptick in number of advisors)