Securities Regulators Look at Making Financial Services Fees More Transparent

Article excerpt

Do you know how your financial adviser gets paid?

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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. …