Mutual fund industry stands up for small investors? Good one

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The mutual fund industry has just offered a rare show of support for the little guy.

It's just for appearances, though. By acting like it's on the side of what it describes as "modest investors," the Investment Funds Institute of Canada is hoping to head off unwanted rule changes being considered by regulators. The proposal is to stop burying the cost of an adviser's services in the fees charged to own mutual funds and have investors instead pay their advisers directly.

This change would add transparency and professionalism to the advice business, the international investment research firm Morningstar argued in a recent note to regulators. The mutual fund industry, as usual looking out for the well-being of advisers who sell its products, takes a different view. It argues in a recent background paper for the media that unbundling advice costs from fund fees would result in an "advice gap," or the inability of modest investors to get advice.

The unspoken foundation of this argument is that investors will run for their lives if advisers start billing them directly. This would theoretically lead to a realignment of the investment business in which advisers either leave the field entirely or decline to serve small accounts.

In fact, small accounts are already being shoved out the door in the brokerage business. In a recent survey done by Investment Executive, 58 per cent of brokers said their firm is encouraging advisers to drop their smallest clients. This reflects the fact that Canada's investment industry as a whole doesn't care a bit about small clients. It lusts after high net worth people with high six-figure accounts at least.

Small accounts pay higher fees and get less service from the traditional advice business. Arguably, that's a fair reflection of the economics of being an adviser today. There are major upfront costs, many of them related to regulatory requirements, and living off small accounts make it hard to pay the bills.

All of this makes it hard to take IFIC seriously as the champion of small investors. This organization doesn't want regulators to do anything that might result in slower mutual fund sales. That's its bottom line, not the interests of modest investors.

Who actually is the friend of the small investor? I vote for robo-advisers.