For many Canadian asset managers, this fall is feeling a little like end times. After scrambling to implement tough new fee-disclosure rules enforced in July, they're now bracing for the provincial securities regulator's final consultative paper on mutual-fund fee reform.
Almost four years after the review on mutual-fund fees started, and two independent studies later, the regulators swear they're ready to get serious. Their research uncovered two unfortunate facts: Mutual funds that pay trailer fees tend to perform worse over time than all other funds, and they also attract more inflows of cash even when they perform badly.
Most people now expect the regulators to ban embedded commissions, such as trailer fees. The big fear for asset managers is that they will go further and outlaw commissions of all stripes. No more money for simply buying and selling stocks for clients.
It may not happen. Regulators are already feeling the heat because the new fee-disclosure rules, known as CRM2, are causing enough problems. But it's worth asking, just to be prepared: Would a full-blown ban on commissions really be all that bad?
Bring the topic up on Bay Street and the knee-jerk reaction is that it has been a nightmare for Britain, which took the dramatic step in 2012. Hardly anyone actually backs this up with facts. Instead, the message is usually delivered in Donald Trump style: "Trust me, yuge headache."
What few people realize is that there are hard data out there, from a thorough review released this year by the Financial Conduct Authority and Her Majesty's Treasury – Britain's equivalent to the Ontario Securities Commission and the federal Finance Department.
The positives: "The move to fee-based advice on retail investment products has improved transparency and ended conflicts of interest caused by a mainly commission-driven model," the report noted. That's big!
But, as with all policy, there have been trade-offs. "Advice is expensive and is not always cost-effective for consumers, particularly those seeking help in relation to smaller amounts of money or with simpler needs," the report noted.
For the average client with, say, £50,000 in investable assets, it has been hard to find advice because brokers can charge only about 1 per cent annually on assets under their watch.
Over two years, the proportion of firms that demand their clients have more than £100,000 in their portfolios has jumped to 32 per cent in 2015 from 13 per cent in 2013.
This isn't necessarily the end of the world. "Not everyone wants or needs a personal recommendation in respect of every decision, nor do they always need a comprehensive assessment of all of their financial circumstances and requirements," the report noted.
There is a gap, though, and the report suspects that it will have to be filled by cheaper, technology-driven options or robo-advisers, especially because the number of human advisers dropped to 31,000 in 2014 from 40,000 in 2011. There just aren't enough to meet demand.
All of that can be jarring, but it actually isn't so bad when you put it in a Canadian context. A full-blown ban on commissions doesn't yet exist here, but the banks, which dominate wealth management, are already firing brokers. The ones they do keep usually focus on high net-worth clients with at least $500,000 in investable assets.
We also have a number of digital wealth management options available, such as WealthSimple. The banks haven't fully committed to the robo-world yet, but privately they say the technology required already exists in-house because they all operate discount brokerages.
Then there's goodwill. Despite all our grumbling about them, Canadians love their banks, so it's not like they have nowhere to turn if the banks launch these services – whereas Brits have learned not to trust their banks after all of their woes during the global financial crisis, according to the report.
All that said, any commission ban would raise thorny issues, some of which don't get enough attention. How will investment banks sell equity offerings that Canada's biggest companies use to finance their growth? Brokers are paid handsomely – often half of the banks' commission – to get their clients to participate in these new stock sales.
But again, there are trade-offs. This month, Crescent Point Energy unveiled yet another $650-million offering, and sources say the majority of it was sold to retail investors because institutional money managers balked at it. These retail buyers have now lost 10 per cent on their investments – but their brokers made out well.
Such issues need to be seriously debated. And if asset managers are smart, they'll come ready to talk, rather than fight tooth and nail. The realistic ones have realized that this is a new world, and even if a full-blown ban isn't implemented, lower fees are the new norm.
Across the street from The Globe and Mail, Royal Bank of Canada has put up a billboard touting all of its low-fee mutual funds. I never thought I'd live to see it.