The total cost of owning a mutual fund in Canada is already fully disclosed and transparent in the Management Expense Ratio (MER). Embedded fees enable individual consumers to compare the total cost of owning various funds. In contrast, U.S. investors pay a misnamed “Total Expense Ratio” (TER), which does not incorporate the separate fee for advice that is typically paid directly to the advisor.
There is no regulatory requirement in the US to publicly disclose the advice fee. As a result, a US investor knows what s/he is paying for advice but has no way of knowing whether the total costs (TER plus advice fee) are consistent with amounts paid by other clients of the same firm, and no way of comparing total costs against what other firms charge.
Another attribute is the strength of Canada’s regulatory environment. Our disclosure regime is already superior to that of any other country, and it will soon be even stronger with recently announced changes to Fund Facts, as well as the full implementation of new Client Relationship Model rules, known as CRM2. Fund Facts will give fund purchasers a four-page summary of key information including costs, risks and fund holdings, all written in plain language.
Under the new CRM2 requirements, investors will receive an annual statement that explains how their investments performed and what they paid to their dealer. This will equip investors to have much more robust discussions with their advisors about the costs and value of their services.
Banning embedded fees just as we embark on a new enhanced disclosure regime seems premature. A more prudent approach would be to complete the implementation of the new initiatives, and allow some time to determine whether they are meeting the intended public policy objectives.
Major public policy changes can have unintended consequences. Following the ban on embedded commissions in the UK. a number of major banks and insurers cut their branch advice arms. Santander, AXA UK, HSBC, Barclays, Lloyds and the Royal Bank of Scotland are reportedly leaving the mass market because small accounts are not serviceable in a fee-for-service market.
HSBC has withdrawn advice to customers investing less than £50,000, or almost $80,000 Canadian. The move is causing significant layoffs: these banks have cut several thousand advisors from their staff in the past few months. As a result, smaller investors will experience an advice gap while fee-for-service advisors focus their attention on high-net-worth clients.