3 Mutual Fund Fees Paper - Why? Perception persists that investors in mutual funds are among the most “retail” of retail investorsFinancial literacyInvestor protectionConcerns:Difficult to comprehend disclosure and lack of understanding by investors, especially on fees and risksConflicts of interest inherent in industry practices (mostly around compensation)FairnessComplexity of productsOtherConflict of InterestInternational changes
4 CSA Paper – Mutual Fund Fees Paper Issues raised:Prevalence of mutual funds within investment portfolios of Canadians, “Canadian fees are among the highest in the world”Investors do not understand fees, disclosure too complexConflicts of interestCross-subsidizationOngoing services to be provided in exchange for embedded trailer commissions not clear (fees for advice)Limited low-cost options for DIY investors
5 Mutual Fund Fees Paper - Considerations Possible changes:Trailing commissions paid for advisor servicesStandard class for DIY investorsUnbundling trailing commission componentSeparate series for each purchase optionCap commissionsAdditional standards and duties for advisorsNo advisor compensation set by fund manufacturers
6 CSA – Best Interest Duty CSA Consultation Paper “The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients” – October 2012OSC hosted three stakeholder roundtables in June-July 2013OSC 2014 Annual Report - The OSC made it a priority in to re-evaluate how advisors work with their clients.
7 CSA – Best Interest Duty Principal concerns with current regimeAsymmetry in investment knowledgeInvestors believe that best interest duty already presentSuitability standard is not enoughConflict of interest disclosure requirements not being employed effectively
8 CSA – Best Interest Standard Every adviser and dealer (and each of their representatives) that provides advice to a retail client with respect to investing in, buying or selling securities or derivatives shall, when providing such advice(a) Act in the best interests of the retail client and(b) Exercise the degree of care, diligence and skill that a reasonably prudent person or company would exercise in the circumstancesDuty would constitute a “fiduciary” duty that would not be open to contractual variation, and would only apply when “advice” given to a “retail” client.
9 Key Regulatory Theme = Investor Protection OSC 2014 Annual Report – “Investor protection is a core part of our mandate. This focus has supported our scrutiny of registrant compliance with suitability obligations, our examinations of a best-interest standard for dealers and advisors and the evaluation of mutual fund fee structures and the impact of these on investor outcomes.”
10 Mutual Fund Fees /Best Interest Standard Mutual fund fees and best interest standard are inextricably linked.Mutual fund fee paper: 99 comment lettersStatutory best interest duty: 93 comment lettersPlus in-person consultations
11 Investor Advocate Response Key ThemesRecommend prohibition on embedded compensationMisalignment of interestsDisclosure initiatives are not enoughInvestors should have TRUE choiceRecommend best industry duty for advisorsLow advisor proficiency and confusing titlesWhat is a “Financial Advisor”?
12 Industry Response No evidence of investor harm Unintended consequences Reduction in access to adviceElimination of choice regarding payment of financial adviceUnlevel playing field with competing productsEfforts already underway to strengthen current regime (e.g., CRM, fund facts)Wait for results of international reformsHas potential to make registrants guarantors or insurers of their advice – who is responsible for investment decisions?How is “best” defined?
13 Other jurisdictions: U.S. Points of differentiation with CanadaProposal: Reform of trailing commissions to cap aggregate sales charges to investors“marketing and service fee”“ongoing sales charge”conversion of share classStudy: Best interest standard for investment advisers and broker-dealersCurrent fiduciary standard for advisersCurrent suitability standard + fair dealing for broker-dealersStudy: Financial literacy
14 Other jurisdictions: United Kingdom - FSA Retail Distribution Review (RDR) United Kingdom - new rules ended commission-based system of advisor compensationJanuary 1, implementation of an ‘Adviser Charging’ system, as part of its Retail Distribution Review (RDR)Advisor and client set rates (fixed, hourly, etc.)Ongoing fees permittedCompensation based on level of service (rather than product)Restricted advisorIndependent advisorNew statutory best interest standard for advisorsCode of ethics on advisors
15 Other jurisdictions: Australia - Financial Advice reforms Australia - ban on sales commissions and trailer commissionsFuture of Financial Advice (FoFA) reforms came into effect July 1, 2012 (compulsory as of July 1, 2013)Similar to U.K., negotiate fees, ongoing fees permittedRenew advisory agreements every 2 years (on-going advice)Concept of “Scaled Advice”advice that fits client needsNew statutory best interest duty for advisors‘reasonable steps’ qualification
21 Mutual Fund Fees: Regulatory Initiatives - CRM2 To provide investors with clear and meaningful information on the costs and performance of their investments
22 Mutual Fund Fees Paper - Status Regulatory next steps:CSA has awarded two research contracts to review Canada’s mutual fund fee structure:Evaluate extent to which sales and trailing commissions influence fund sales.Evaluate extent to which the use of fee-based vs. commission-based compensation changes the nature of advice and investment outcomes over the long term.How:Data requestsLiterature reviewDue:Both due the first quarter of 2015
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