By Tom Bradley

I’ve grumbled in this space numerous times that the mutual fund industry is stuck in the dark ages. Its automatic response is to resist change and improvement. Meanwhile, the world moves on and clients find other ways to invest (ETFs being one example). While the fund companies and mutual fund dealers wallow in denial, their voice (and products) become less relevant. The industry has ceded leadership on client-friendly initiatives to the regulators.

A couple of years ago, the Canadian Securities Administrators (CSA), led by the Ontario Securities Commission, had to fight through a wall of resistance when it rolled out new standards for performance and fee reporting. It seemed like a reasonable initiative - telling clients how they’re doing and what they’re paying - but the industry fought the new regulations every step of the way.

The current battle is also fee related. The regulators are looking at embedded commissions, or trailer fees, to determine what changes need to be made, or indeed, whether they should be banned altogether. From research it carried out in 2012, the CSA discovered that two-thirds of investors didn’t know they were paying a trailer fee to their advisor (or discount broker). Given this appalling statistic, this too seemed like a reasonable initiative to take on (we made a submission on this issue).

But let me tell you, trailing commissions make previous battles look like minor skirmishes. The industry has drawn a line in the sand and brought out the heavy artillery. With few exceptions, the fund companies, dealers and banks have formed a united front and nobody is stepping out of line. The message is clear – banning embedded commissions will destroy the industry and make it difficult for small investors to get advice. The status quo should be maintained. In other words, “Just let us charge most of our clients too much (unknowingly) so we can subsidize the small clients (thank you, thank you, thank you).”

Not surprisingly, the battle is dragging on. I believe the OSC wants to deal firmly with trailers, but it has a difficult decision on its hands and the constant shelling from the industry is taking its toll. The CSA has announced that it’s going to use independent research firms to do further research on how sales and trailer commissions influence sales patterns and how clients are advised.

Stay tuned. The battle rages on and mysterious, commission-sold mutual funds become more irrelevant by the minute.