The Ontario Securities Commission (OSC), acting on behalf of the council of the securities regulators of Canada’s provinces and territories, commissioned The Brondesbury Group to review the existing research on mutual funds compensation schemes.
It was tasked with evaluating the extent to which the use of fee-based versus commission-based compensation changes the nature of advice and investment outcomes over the long term.
The review, made public last week, found all forms of compensation affect advice and outcomes and, as a result, the Brondesbury Group said in its report that there was “conclusive evidence that commission-based compensation creates problems that must be addressed.”
“Fee-based compensation is likely a better alternative, but there is not enough evidence to state with certainty that it will lead to better long-term outcomes for investors,” its report stated.
Among the conclusions the group reached after reviewing the literature on the subject were that funds which pay commission underperform.
“Fee-based compensation is likely a better alternative."
“Returns are lower than funds that don’t pay commission whether looking at raw, risk-adjusted or after-fee returns.”
It also found that:
- Mutual fund distribution costs raise expenses and lower investment returns.
- Advisors push investors into riskier funds, and
- Investors cannot easily assess what form of compensation is best for them and readily make sub-optimal choices.
Trail commissions targeted
The report is part of a broader initiative by the Canadian Securities Administrators (CSA) organisation, which co-ordinates efforts among Canada’s provinces and territories to improve the nation’s capital markets, to determine whether mutual fund companies should ban the use of trailer commissions.
Canadian regulators are expected to make a decision regarding the banning of trailing commissions in early 2016.
The CSA has commissioned a second piece of research from Professor Douglas Cumming from the Schulich School of Business at York University. The Cumming’s report will examine whether trailing commissions influence mutual fund sales. It is expected to be completed and made publicly available this summer.
““The Brondesbury Report, together with the comments received during our stakeholder consultations and the forthcoming research by Professor Cumming, is intended to be among the inputs that will be factored into the CSA’s determination of whether to effect certain policy changes,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers.