TORONTO — The fees Canadians pay to invest in mutual funds are under scrutiny as the national securities regulator reviews whether the often used embedded compensation system is in the best interest of investors.
Earlier this year, Australia and the U.K. banned so-called ``trailing commissions'' in their financial services industries following two massive fraud scandals.
While industry and consumer advocates in Canada are at odds over whether such a ban would meet the aim of increased transparency in the industry, they do agree change is needed.
``It is very confusing for consumers right now,'' said Jonathan Bishop, a research analyst with the Ottawa-based Public Interest Advocacy Centre.
In Canada, mutual fund and investment advisers can be paid by their clients in a number of ways, including an hourly rate or a flat fee.
Most commonly, however, they are paid through an embedded fee system, usually a predetermined percentage taken directly from a client's total investments.
This amount, called a management expense ratio (MER) is set by fund companies and is generally around 2.5 per cent annually. It covers a variety of fees including the adviser's cut, which ranges around one per cent.
The industry has been criticized for a lack of regulation when it comes to disclosing embedded fees to consumers. Not all investors are aware of how much they pay in these fees, because they're not billed, or know that other payment options are available.
The Canadian Securities Administrators, responsible for securities regulations across the country, recently addressed the disclosure issue by requiring investors to be given a breakdown of embedded fees and the services they cover for each quarter. This requirement will be fully implemented by July 2016.
The Ontario Securities Commission is planning a formal review of the fee system, the services available and whether further regulations are needed. During the summer, it collected feedback from a public forum it held with industry stakeholders.
``Any step towards disclosure is a positive approach,'' said Bishop, adding that the Public Interest Advocacy Centre would prefer to see embedded compensation in place until the industry can find ``common ground'' on the best approach for consumers.
PIAC suggests stiffer regulations on how advisers describe the services they offer, and the cost. It also wants scheduled meetings between advisers and clients to discuss their portfolios and fees.
Ed Skwarek with Advocis, a group which represents 11,000 financial advisers across the country, said demand for the embedded compensation system is driven by the market.
``It's always been that way; since inception,'' he said.
Skwarek, who will join a panel discussion Monday on the issue at the annual Advocis Regulatory Affairs Symposium in Toronto, said the bans overseas may have been aimed at making the fee system more transparent but has pushed some investors out of the market.
``With the switch that has taken place, they're cutting out a large segment of people who aren't investing because they can't afford it,'' he said, referring to rates for advisers that can average $300 an hour, or flat rates of between $1,000 and $3,000.
But the Small Investor Protection Association, a national non-profit organization, said consumers would get a better deal if embedded compensation were to be banned because the increased competition would raise the quality of advice and products.
``Even if it (the fees) were a little more expensive, the advice would be pure, would be tailored to that person and be in their interest,'' said chair Ken Kivenko, whose group represents members with an average net worth of $500,000.
He likened some financial advisers in the embedded fee system to ``salesmen,'' as their fees are derived from the sale of products such as mutual funds.
``How much advice are you really getting?,'' he said. If they (advisers) don't make a sale, then they don't eat. Is that advice?``
``Our members, there's no question about it, they feel like they are being screwed,'' he said.