Embedded fee model under current regulatory structure serves Canadians well

April 12, 2013

Toronto, ON - April 12, 2013 - The Investment Funds Institute of Canada (IFIC) submitted comments today on the Canadian Securities Administrators' (CSA) Discussion Paper 81-407 - Mutual Fund Fees, linked here:
http://www.osc.gov.on.ca/documents/en/Securities-Category8/csa_2012123_81-407_rfc-mutual-fund-fees.pdf.
In its response, IFIC highlights the effectiveness of Canada's current regulatory regime and demonstrates the benefits to investors, particularly those with small to average accounts, of Canada's prevalent embedded fee model.

"The current regulatory environment in Canada is serving investors well," said Joanne De Laurentiis, President and CEO of IFIC. "While there have been significant gaps in the regulatory structures in other jurisdictions, such as the U.K. and Australia, securities regulation in Canada is consistently ranked among the best in the world."

The IFIC submission supports the CSA for opening the policy review with a discussion paper, rather than draft regulations; however, it also expresses disappointment that the discussion paper focuses narrowly on mutual funds without meaningful reference to other retail financial products, where the cost of distribution is embedded in the price, and which make up over 70% of the financial assets in the household balance sheet of Canadians.

In addition to commenting on the specific options put forward in the discussion paper, IFIC sets the record straight on a number of misconceptions with respect to fund fees.
Commenting on an underlying theme within the discussion paper that trailing commissions are used exclusively to compensate advisors, IFIC explains that a portion of the trailing commission is retained by the dealer to cover a host of regulatory and supervisory functions, with the other portion used to compensate the advisor for providing a range of on-going services to the investor.

"The embedded fee model is of particular benefit to small and first time investors," De Laurentiis said. "Most first time investors in Canada start with less than $25,000, which translates into an annual fee for investment advice of about $100. Compare that to hourly fees of $150 to $300 per hour, and it's clear that the trailer fee represents exceptional value for smaller investors."

Recent research into U.S. fees conducted by Strategic Insight (New York) reveals that investor costs have risen as that market has evolved away from embedded fees. "With mounting evidence of the value of advice, this trend should be of real concern to public policy makers," De Laurentiis added. Similarly, IFIC observes that early reports from the U.K. indicate that the legislated prohibition of embedded fees there may be creating an 'advisor gap'. "The options put forward in the discussion paper are being driven, in part, by changes in other jurisdictions", said De Laurentiis. "We see no evidence in Canada of the regulatory gaps that drove changes in the U.K. and Australia, and we should be very wary of adopting their approaches without understanding the consequences for investors."

The cost of owning mutual funds in Canada is cited by the CSA as a factor in its review of fund fees. However, as recent research conducted by Investor Economics (Toronto) and Strategic Insight shows, the fees paid by advised investors in Canada are very close to those paid by U.S. advised investors when tax differences are accounted for.

IFIC's submission points to several about-to-be-implemented enhancements to the disclosure regime in Canada and strongly recommends that these changes be allowed to take effect to determine whether they mitigate any valid concerns regarding awareness of fees. The full text of IFIC's submission and supporting documents can be found at this link:
http://www.osc.gov.on.ca/documents/en/Securities-Category8/csa_2012123_81-407_rfc-mutual-fund-fees.pdf.

IFIC is the voice of Canada's investment funds industry. IFIC brings together 150 organizations, including fund managers and distributors, to foster a strong, stable investment sector where investors can realize their financial goals. The organization is proud to have served Canada?s mutual fund industry and its investors for more than 50 years.


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For more information contact:
Sara Clodman
Senior Manager, Public Affairs
The Investment Funds Institute of Canada (IFIC)
Phone: 416-309-2317
Email: sclodman@ific.ca
Website: www.ific.ca

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