Mu­tual fund fee re­view in dis­ar­ray af­ter On­tario’s op­po­si­tion

The Globe and Mail Metro (Ontario Edition) - - REPORT ON BUSINESS - CLARE O’HARA TIM KILADZE

On­tario’s de­ci­sion to in­ter­fere in a na­tional re­view of mu­tual fund fees has thrown the six-year study into dis­ar­ray, rais­ing ques­tions about the prospects for change, in­clud­ing the elim­i­na­tion of early-with­drawal fees.

On Thurs­day, the Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors, an um­brella group for all pro­vin­cial se­cu­ri­ties watch­dogs, pro­posed changes that would pro­hibit the fees, known as de­ferred sales charges (DSCs), on mu­tual funds. The re­view in­cluded pub­lic con­sul­ta­tions and re­search pa­pers, and the pro­vin­cial reg­u­la­tors sup­ported the rec­om­men­da­tions.

Shortly af­ter the pro­pos­als were for­mally an­nounced, On­tario Fi­nance Min­is­ter Vic Fedeli re­leased a state­ment op­pos­ing the rec­om­men­da­tions. In do­ing so, the prov­ince has stalled the planned re­forms, rais­ing the pos­si­bil­ity that no changes will take place. That would mean some cus­tomers will con­tinue to be sub­ject to the fees, of which they are of­ten unaware.

The watch­dogs say their pub­lic com­ment pe­riod for the pro­pos­als will re­main open for the next 90 days.

“As with all CSA con­sul­ta­tions, [reg­u­la­tors] will care­fully con­sider all feed­back and com­ment let­ters re­ceived,” the group said in a state­ment.

How­ever, the OSC is the largest of the pro­vin­cial reg­u­la­tors, and has ac­knowl­edged it must ad­here to the de­sires of the pro­vin­cial govern­ment – lead­ing an­a­lysts and ad­vis­ers to be­lieve the fees will con­tinue.

Call­ing On­tario’s op­po­si­tion an “un­ex­pected de­vel­op­ment,” CIBC World Mar­kets an­a­lyst Paul Holden noted the pro­vin­cial Fi­nance Min­istry has fi­nal ap­proval on reg­u­la­tory pro­pos­als from the OSC. “Our as­sump­tion then is that DSC is here to stay,” he wrote in a re­search re­port.

Based on this as­sump­tion, fi­nan­cial ad­vis­ers and money man­agers con­cerned about in­vestor costs ex­pressed dis­may at the govern­ment’s sud­den in­tru­sion. Be­cause of the early-with­drawal fees, in­vestors of­ten find them­selves un­able to ac­cess their own money for years.

“The zeit­geist right now is a move to­wards trans­parency and flex­i­bil­ity,” said David O’Leary, founder of Kind Wealth. By con­trast, the On­tario govern­ment wants to fight a ban on what is widely viewed as an ar­chaic fee struc­ture at a time when wealth man­age­ment gi­ants such as Fidelity are in­tro­duc­ing no-fee funds.

“They’re go­ing to be on the wrong side of his­tory,” he added.

DSCs force clients to pay as much as 6 per cent to cash out their mu­tual funds, a fee that tends to fall by 1 per cent each year, down to zero per cent af­ter hold­ing for five to seven years. While 18 per cent of all mu­tual fund as­sets – about $300-bil­lion – in Canada car­ried the DSC op­tion at the end of 2016, DSCs are used on only 1 per cent of mu­tual fund as­sets in the United States and Europe, the CSA says.

His­tor­i­cally, DSCs were thought to ben­e­fit lower-in­come in­vestors, be­cause they al­lowed them to buy mu­tual funds with­out pay­ing up­front. (Mu­tual funds used to cost as much as 9 per cent to buy in.) In­vest­ment ad­vis­ers also liked DSCs be­cause they would re­ceive a 5-per-cent com­mis­sion from the mu­tu­al­fund man­u­fac­tur­ers for sell­ing funds with these fees to their clients, giv­ing them a rea­son to take on lower-in­come clients.

At the same time, the penalty for sell­ing a fund within seven years of pur­chase forced buy­ers who were aware of the fees to hold onto the in­vest­ments, some­thing thought to en­cour­age in­vest­ing dis­ci­pline dur­ing mar­ket hic­cups.

Al­though other Western coun­tries have largely aban­doned DSCs, some Cana­dian mu­tual fund and ad­viser lobby groups sup­ported On­tario’s op­po­si­tion to the ban. “The DSC is a good pay­ment op­tion for some in­vestors who would not oth­er­wise have ac­cess to fi­nan­cial ad­vice,” Paul Bourque, pres­i­dent of the In­vest­ment Funds In­sti­tute of Canada, said in a state­ment.

Over the years, how­ever, reg­u­la­tors found an in­creas­ing num­ber of in­vestors were in­cor­rectly sold DSC funds – specif­i­cally re­tirees who do not have long-term in­vest­ment hori­zons.

Mr. Fedeli did not re­spond to a re­quest for com­ment.

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