Which comes first? CRM2 or the end of trailer fees?

CIBC analysts Robert Sedran and Paul Holden recently issued a note to clients predicting trailer fees will soon go the way of the dodo bird. The question for them is when, not if.

Which comes first? CRM2 or the end of trailer fees?
Trailer fees, the backbone of mutual fund compensation in Canada, are on their way out. At least that’s the opinion of two highly regarded analysts from CIBC who see regulators following a similar path to those in the UK and Australia.

With the clock ticking down to July 15, 2016, the date CRM2 is fully implemented, the only question seemingly needing an answer at this point is whether a ban on trailer fees will be total or partial in scope and whether it will happen prior to CRM2 or soon thereafter.

The Canadian Securities Administrators (CSA) is currently soliciting 10 years of mutual fund data from fund companies in order to study the impact of trailer fees and other commissions on the ongoing sale of funds. The study, which is being conducted by Schulich School of Business finance professor Douglas Cumming, is completely voluntary with participants able to withdraw at any time, making it a relatively toothless endeavour. 

Nonetheless, WPs recent coverage of fee reductions at several mutual fund companies suggests CRM2 continues to pressure margins. While it’s difficult to predict which firms will be in a better position to compete post-2016, Sedran and Holden see CI Investments taking market share in the independent space with the big banks holding their own. The biggest unknown when it comes to winners and losers under CRM2 is whether some of the fund factories from the U.S. join the fray. Vanguard is the most likely but would only consider a move sans trailer fees.

Not everyone, however, is convinced that trailer fees will be done away with making long-term planning by advisors very difficult indeed.

Better safe than sorry, it seems sensible that financial advisors heed the warning of Sedran and Holden, and prepare for a world in which trailer fees don’t exist, whether that happens before or after July 2016.