Not exactly. Scratch the surface and you’ll find that the mutual fund industry is under attack from several directions and is fighting what may be a losing battle to protect its turf. Antagonists include:
The federal government: Finance Minister Jim Flaherty announced in his budget that Ottawa will ban “character conversion” funds, those which use derivatives to artificially change highly-taxed interest income into low-tax capital gains. Many fund companies offer these products.
Regulators: Canada’s securities regulators are taking aim at financial advisors, who provide the main distribution network for mutual funds. They want statements to clearly set out in dollar terms the annual cost of owning a mutual fund, including all hidden fees. The watchdogs are even toying with the idea of requiring advisors to give greater priority to a client’s best interests than to their own commissions. The wails of protest are echoing down Bay Street.
Critics: Over the years, there has been a drumbeat of criticism of the high fees charged by mutual funds. Lately, it has been escalating and more people have been paying attention. IFIC continues to fire back, releasing a report in March which claims that fees in Canada and the U.S. are comparable and that the American model actually offers less transparency than ours. The critics are unimpressed.
Exchange-traded funds: ETFs are still the new kid on the block and in terms of total assets they trail far behind the mutual funds industry. But they are steadily eating away at market share as investors buy into their story of low fees and clarity of purpose.
Most of the head honchos of the mutual fund companies seem quite sanguine about the whole situation, at least publicly. But a few mavericks are making waves. One of them is Tom Bradley, CEO of the tiny Vancouver-based Steadyhand Funds. In a mid-April submission to the Canadian Securities Administrators (CSA) he blasted the current fee system and said flatly it should be completely dismantled.
The document, which can be found on the Steadyhand.com website, will be an eyeopener for those who think like the people quoted on the opening page. One said: “Our financial advisor is such a nice man. Every year he takes us out for a wonderful dinner. I wish we could pay him in some way.”
Another commented: “I’m looking to move my account. My advisor is switching me over to what he calls an asset-based fee of 1 per cent. I’m pissed. I didn’t have to pay before”.
What these folks don’t realize is that they are paying, big time.
“When an investor buys a mutual fund, a large portion of the MER (management expense ratio) goes towards paying a sales commission and fee for investment advice (91 per cent of mutual fund assets in Canada were acquired and held through channels involving an advisor),” the Steadyhand submission states. “But clients don’t know how or how much they’re paying, let alone what services they should expect to receive. It follows then that the less investors know about the fees they’re paying, the greater the chance their interests will be subordinated to those of the dealer.”
Mr. Bradley wants the current system replaced with one that is simple, transparent, and cost effective. He feels the interests of clients and advisors should be more closely aligned and that the issue of compensation should be dealt with in an up-front and business-like manner. Investors should understand nothing is “free” and decide for themselves if they are getting their money’s worth.
Change is long overdue. Good on Mr. Bradley for saying so. But you can bet the big players in the mutual fund industry are going to fight to the bitter end. Stay tuned.
Original Article
Source: thestar.com
Author: Gordon Pape
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