The Canadian Securities Administrators (CSA) recently released discussion paper 81-407 which examines the mutual fund fee structure in Canada. The paper provides an overview of the roles of market participants in the mutual fund industry and the current mutual fund fee structure, identifies investor protection and fairness issues arising from the current fee structure, provides an overview of global regulatory reforms and describes some regulatory options the CSA could consider.
The CSA identified issues arising from the mutual fund fee structure in Canada that include: (i) lack of investor understanding of fund costs and control of advisor compensation; (ii) potential conflicts of interest at the mutual fund manufacturer and advisor levels; (iii) the potential for cross-subsidization by investors of the various costs associated with different purchase options; (iv) the alignment of advisor compensation and services; and (v) few low-cost options for do-it-yourself investors.
The CSA also identified the following possible changes to the mutual fund fee structure in Canada:
- Specify services to be provided by advisors in exchange for trailing commissions to more clearly align the two
- Create a low-cost, execution-only series or class of mutual fund securities available for direct purchase by investors which would have no or reduced trailing commissions
- Improve transparency by unbundling the trailing commission component of management fees and charge/disclose it as a separate asset-based fee
- Maintain a separate series or class of securities of each mutual fund for each available purchase option to guard against cross-subsidization
- Cap trailing commissions and/or sales charges
- Implement additional standards or duties for advisors to put their clients’ best interests first
- Discontinue the practice of advisor compensation being set by mutual fund manufacturers.
Comments on the Discussion Paper are due April 12, 2013. The CSA indicate that they will host a roundtable with investors and industry participants in 2013.