Recommendations for Portfolio Funds
The Canadian Investment Regulatory Organization (CIRO) regulates all investment activities in Canada. One area of CIRO oversight is how investment products are marketed to the public. Here are our Portfolio Fund recommendations to address marketing concerns posted elsewhere and linked below.
CIRO has broad responsibilities and powers to back up their responsibilities! They are clearly a very important player in this market.
From their website, CIRO’s Vision is to “Be an agile and trusted regulator who helps the investment industry deliver the right financial outcomes for investors.” Previous regulators made changes which have provided significant benefit to the banks and their associated companies. But the result of these changes also included reduced long-term benefits to investors. We are hoping that CIRO will be different.
Our concerns about the marketing of Portfolio Funds by Canadian banks in particular are discussed here and here.
Here are some thoughts as to how CIRO might address these concerns.
1. Fund Cost Clarity
The presence of a series of mutual fund which has an artificially low MER, created by transferring cost to the Portfolios is extremely deceptive. The banks currently present funds which can only be purchased from fee-based advisors as 2- or 3-star funds as 3- and 4-star funds respectively.
CIRO should immediately outlaw the practice of transferring costs in any way between mutual funds. In addition CIRO should ban contributions from one fund to another fund in any form other than purchasing units of that fund. Portfolios should be required to market the result of the fee-based series of their funds. The fee based version most closely represents the cost of running, but not marketing, the funds.
We recognize that this one change would negatively impact the results of the banks. Currently, average Canadians invest well in excess of $500B in funds which they believe will provide reasonable returns. Instead they get funds with unproven records and below benchmark performance. That fact should be made clear to the investors who don’t have the knowledge to investigate these funds completely.
2. Management Fees
Upon it’s creation MER was intended to cover ALL the costs of running the fund, providing cost clarity to investors. There are 2 changes needed here. </p>
The first change is to address the current practice at RBC Global Asset Management of separating Management Fees from their published MER. Their funds seem to have a low MER compared to peers when looking at investment websites such as Morningstar and Globefund. Deceptive marketing should always be banned.
The second change is to limit the actual management fees mutual fund operators can charge their clients. This is especially egregious for portfolio funds where the actual expenses of the portfolios are very low. As shown in the RBC article linked in the paragraph above, RBC collects $2.535B in management fees from charging an average of 1.59% on the 37 portfolio style funds we were able to identify on their website.
CIRO reduced the maximum up front commission rate from 3% to 2%. Across a 30 year investment cycle, this will save an investor exactly 1%. Reducing this usurious ANNUAL charge to a maximum of 0.75% above actual proven expenses of the fund increases the clients net by 35%! The impact of one change is tiny to the client, while the other is very significant!
Final thoughts
Initially, it seems to be a good thing for small investors to limit the commissions charged when placing new investments. However, the long-term impact of this change is to prevent new people from starting at commission based service providers. They cannot make enough money to survive while they build a client portfolio.
Small investors are currently massively underserved by the investments provided to them through their banks. There must be a path for developing independent advisors in the industry.
If CIRO is truly working in the interest of investors then it should eliminate large fees the banks charge while providing inferior products. They should also provide for the development of viable alternatives to needing to go to a branch for investing advice and know-how.
For other examples of changes we recommend to help Canadian investors check out our Industry Issues blog posts.