The Winds of Change

Behind the scenes regulators and lobby groups are locking horns over the way in which most Canadians currently pay for financial advice and the future of embedded fees.
What’s an embedded fee?  It’s a fee you don’t see.  For most, it’s the cost of owning mutual funds but it also extends to other investments.
Mutual funds charge fees to manage your investments.  Part of the fee is paid to manage the investments (management fee) with another part (trailer fee) paid to the dealer and advisor for servicing.  Fair enough.
The problem with this approach?  You don’t ever get a breakdown of how much you are paying, a breakdown of who gets what or an alternative.
The Canadian Securities Administrators (CSA) has been seeking comments on their discussion paper 81-407 which includes a proposal to enlighten consumers.  If minimum standards are imposed expect much more detail on what you are paying to own mutual funds and more comprehensive reporting on actual returns in both dollar and percentage terms.
Transparency is always a positive step and for those of us who have largely moved away from embedded fees we’re already positioned for this inevitability.
But, how far will the CSA go?  There is also plenty of debate about whether banning trailing fees altogether and forcing companies to bill consumers directly will be implemented.
Many industry lobby groups suggest that a major re-work of how the industry is compensated will have unintended consequences and affect a large percentage of the investing public.  They argue that the small investor will be caught in the middle and not have access to the same advice and services they’ve come to expect.  They argue it’s unfair to only target mutual funds and that already improved disclosure documents and many of the changes being sought are already coming to fruition due to market forces.
The industry itself seems united on the fact that they are not against the present third party compensation paid by mutual funds to their dealers and advisors.  They primarily differ on transparency and reporting requirements.  However, the CSA and consumer lobby groups are trying to balance industry concerns with the rights of a large percentage of investors who have limited understanding of an increasingly complex financial landscape.
Regardless of what changes are imposed, neither the status quo or potential new reporting regulations are going to be a panacea in helping Canadians retire any earlier.