Investing stakeholders deeply divided over potential reforms

Views on mutual fund fees and the role of advisers vary widely in newly released Canadian Securities Administrators papers

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Stakeholders in the financial industry are deeply divided about the future of investing in Canada, according to two reports released by the Canadian Securities Administrators on Tuesday. The CSA, which is an umbrella organization of provincial and territorial securities regulators, has been gathering input from stakeholders on proposed financial reforms that could lead to significant changes in the industry if implemented.

The first paper, CSA Staff Notice 33-316, gathered input on the issue of having advisers switch to a standard of being obligated to act in their clients’ best interests. Currently advisers only have to recommend investments that are ‘suitable’ for clients, but not necessarily the best products for their situation.

Stakeholders who were in favour of the changes felt that investors are not adequately protected, as advisers are able to recommend products that offer them the highest compensation rather than ones they feel are the best investments. They say many clients falsely assume their advisers must act in their best interest already, and that Canada is falling below standards in other countries.

Opponents of the changes, however, feel that the current system is adequate in protecting investor interests. They fear that a higher standard would lead to increased costs for investors, as advisers would face more complaints and litigation. Some opponents also noted that clients would have less motivation to educate themselves if they know their adviser is obligated to act in their best interest.

A second paper, CSA Staff Notice 81-323, presents feedback on the issue of mutual fund fees. Industry stakeholders feel the current structure of allowing embedded fees in mutual funds that are paid to advisers isn’t a problem. They fear a ban on embedded compensation would reduce access to advice from retail investors with small accounts and would reduce choice. These industry stakeholders would prefer to watch the impact of recent reforms in the U.K. and Australia before making any changes.

However, investor stakeholders disagree, saying that embedded commissions lead to a misalignment of interests and should be banned. They believe the practice can spur advisers to recommend products that pay higher commissions, rather than products that are best for the investor. Also, they believe small retail investors won’t go without advice, as they will continue to get service from bank branches, where many of them do their investing already.

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