OSC releases report on mutual fund comp.

OSC releases report on mutual fund comp.

OSC releases report on mutual fund comp. The OSC has released its findings from the Brondesbury Report, which assesses the extent to which the use of fee-based vs. commission-based compensation changes the nature of advice and impacts investment outcomes over the long-term.

“The Brondesbury Report, together with the comments received during our stakeholder consultations and the forthcoming research by Professor Cumming,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers, “is intended to be among the inputs that will be factored into the CSA’s determination of whether to effect certain policy changes.”

The report suggests that fee-based compensation is likely a better model than commission-based compensation but softens its stance by suggesting there’s not enough evidence to determine conclusively that the former compensation model delivers better long-term outcomes for investors.

When it comes to advisor compensation, the report makes three major conclusions:
  • Funds that pay commission underperform.
  • Distribution costs raise expenses and lower investment returns.
  • Advisor recommendations are sometimes biased in favour of more compensation for the advisor.
Other interesting findings from the report include:
  • Compensation influences the flow of money into mutual funds. Higher embedded commissions stimulate sales.
  • Advisor recommendations are sometimes biased in favour of alternatives that generate more commission for the advisor.
  • Commission is only one form of inducement that influences sales. Other inducements (e.g., advancement, recognition, etc.) can also influence sales.
  • Compensation affects the effort made by advisors to overcome investor behavioral biases, including biases that may lead to sub-optimal returns.

“In summary, the evidence on compensation is conclusive enough to serve as a basis for policy formulation,” the report’s executive summary states. “Nonetheless, there are questions about the impact of new compensation schemes and their impacts that need to be addressed to ensure that undesirable and unintended outcomes are minimized.”
  • John De Goey 2015-06-11 1:42:09 PM
    In other news, the Pope is Catholic!
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  • John De Goey 2015-06-11 1:42:53 PM
    Hands up - who is 'surprised'?
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  • Michael Gentile 2015-06-11 3:37:20 PM
    Re: 3 Major Conclusions

    1. How do you conclude that funds that pay a commission underperform? We offer numerous funds on a front end zero basis that significantly outperform many funds with and without a commission structure.
    2. There is a cost to doing business which of course involves distributions. Show me a business that doesn't have distribution costs.
    3. Nothing like getting tarred by the same brush eh? We do not make recommendations based on compensation and never have. Our primary interest is in providing our clients with funds commensurate with their risk tolerance as well as consistent positive rates of return and meeting their short and long term objectives.

    In terms of a conclusion, I am willing to conclude that somebody didn't do a thorough job on their homework. Or to put it another way, there are 2 sides to the coin and I am not sure that they have acknowledged that.
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