Free the mutual fund fee

In the last few weeks, the Ontario government stirred public debate when it asserted its authority to oppose a draconian ban that would have limited investors’ options when purchasing mutual funds.

The issue at stake is whether or not consumers should have the choice to defer a sales charge for the service provided by their adviser when purchasing mutual funds — and avoid this charge entirely if they continue their investment for up to seven years (the deferred sales charge period). The regulators had proposed to ban this type of mutual fund sales compensation structure, which is called a Deferred Sales Charge (DSC).

For over four years I have been watching the debates and various viewpoints on how mutual fund representatives — advisers — should be paid. Some of these discussions have led to healthy outcomes where the industry has adopted restrictions such as not allowing the DSC period to extend beyond the investment horizon of an individual investor. For example, if someone is approaching retirement and has a four-year “horizon” for their investment, a seven-year deferred fee plan is not allowed.

Now, however, a wholesale ban on DSC is being contemplated. Many investors of modest means — those without a large amount to invest who rely on commissioned advice without an upfront fee — will likely not be able to receive the helpful advice of an adviser. Regulatory action will create winners and losers in the marketplace. When this sort of drastic market intervention is proposed, it is appropriate for the minister of finance to step in, to look at the concerns and weigh the policy options to ensure a balanced policy outcome. That is precisely what provincial Finance Minister Vic Fedeli did in Ontario.

Here is why we oppose an outright DSC ban. Mutual funds sold on a DSC basis, disclosed to the client, allow for the deferral of fees while also providing upfront compensation for the significant work and advice provided by advisers, particularly at the start of a client relationship. The client does not have to reduce his initial investment to pay an upfront fee. The up-front payment is financed by the fund manager and paid for through a reduced trailer fee.

Without this type of compensation, there is far less incentive for an adviser to work with a client with modest assets. Further, investors will only incur a deferred sales charge if they withdraw more than 10 per cent of their investment annually before it has been held for the deferred sales charge period. Investors can also rebalance and switch to another fund within the same fund company (most offer dozens of different funds) without incurring a charge. The DSC works well for investing long term, particularly in RRSP accounts, where short-term withdrawals are not expected nor recommended.

The regulatory impact of a DSC ban would be felt disproportionately by middleincome Canadians. Many people will no longer have access to the advice that goes with mutual fund investments in Canada.

Who or what will close that advice gap? Some suggest it should be automated robo-advisers. A government committed to working for the people cannot possibly consider regulations that put access to a human adviser out of reach for the ordinary citizen.

Recent research by Pollara found that only 23 per cent of mutual fund investors are aware of robo-advisers and only three per cent have used one. Investors of all means continue to place a strong value on advice and have high levels of trust in their personal adviser. Fully 76 per cent of mutual fund investors report having consulted their adviser in the last year for either investment planning, financial planning or retirement planning. A growing majority of investors with advisers continue to prefer paying their adviser through mutual funds fees (53 per cent did so last year, 59 per cent will do so this year).

There are many ways to address the concerns that regulators express about the DSC model. I applaud Minister Fedeli for considering alternative public policy approaches to a rigid DSC ban that would reduce choice and service for investors of modest means and hamper Ontario’s robust mutual fund industry. If our provinces is open for business, that should mean that the average citizen should be able to choose how they participate in capital markets. They should not be forced to turn to a robot for financial advice. Let’s not leave investors out in the cold this winter.

A RIGID BAN ON DEFERRED SALES CHARGES WOULD REDUCE SERVICE FOR INVESTORS OF MODEST MEANS.