Comments unbecoming of a “wealth management industry”

Comments unbecoming of a “wealth management industry”

Despite fierce industry opposition ,a determined group of regulators has finally made the delivery of Fund Facts mandatory BEFORE the investor is required to make an investment decision. Imagine that!The industry should be embarassed and ashamed at its anti-investor stance over these many years.

One has only to review the comments that were made during the prolonged consultation on the pre-sale delivery of Fund Facts to realize just how big the gap is between sales and advice at the most senior levels of the mutual fund industry ( referring to itself as being in the wealth management industry) . The most basic act of advice is for a professional advisor to explain the product and why it is being recommended for inclusion in a portfolio. For investor advocates, this is so fundamental to advice giving that it is a no-brainer. Yet as you gaze upon some of the comments regulators had to wrestle with, you quickly realize the source of the many problems in the fund industry and the fierce opposition to a Best interests standard is ... top management. Given the intense industry stonewalling ,it is no wonder it took over 10 years to bring in this most fundamental reform related to being in the investment advice business ( The comments actual apply more to an industry in the sales and marketing business ).

Take a look at the rationale used to delay , bypass or kill pre-trade disclosure of Fund Facts:

A few commenters said that, given the substantial anticipated costs and the lack of a detailed cost-benefit analysis, they are unable to agree with the CSA's perspective on the benefits and costs of implementing pre-sale delivery of the Fund Facts.

A commenter noted the "specific" costs of implementing the pre-sale delivery of Fund Facts are:the administrative, production and delivery costs of sending the Fund Facts separately, instead of with the trade confirmation;the operational costs of creating and running a process to ensure for timely pre-trade delivery of Fund Facts and the costs of sufficiently documenting investor receipt of Fun Facts

It was suggested that a trial program be conducted among a sample of dealer representatives to see if the costs associated with pre-sale delivery of the Fund Facts can be justified in terms of its utility for investors.

Some commenters said that moving from post-sale to pre-sale delivery of Fund Facts is a significant change that shifts the delivery obligation from a dealer back office operation to the front line sales force. Therefore, the pre-sale delivery requirement will affect independent dealer representatives and small firms in a disproportionate manner.

Furthermore, a number of independent mutual fund companies are dependent on third party distributors, who seldom have face-to-face meetings with investors and often rely on telephone conversations or other means of communication.

Several commenters expressed the view that pre-sale delivery of Fund facts would slow down the sales process.

Some commenters that it is important to make a distinction between investors who rely on a dealer representative's recommendation and those who rely on their own research and judgment. We were told pre-sale delivery of the Fund Facts will only delay an investor from executing an investment decision they have already made.

Some commenters said that the requirements to qualify for the pre-sale delivery exception are unduly narrow and are likely to frustrate some investors, especially experienced and knowledgeable investors who do not want orders delayed pending delivery of the Fund Facts. These investors should be allowed to expressly waive pre-sale delivery of the Fund Facts in favour of post-sale delivery.

The pre-sale requirement will be less onerous for bank-owned distributors, who meet with investors at a local branch, facilitating in-person pre-sale delivery of Fund Facts.

Some commenters also noted that pre-sale delivery will impact a dealer representative's product shelf because it will be more difficult for smaller and independent dealers to distribute a wide selection of mutual funds. To ensure pre-sale delivery of the Fund Facts and to complete transactions on a timely basis, dealer representatives may be forced to narrow their "product shelf." Over time, this may affect the level of competitiveness of the mutual funds industry.

One commenter noted that an unsatisfactory transition period would pose serious human resource challenges, leading to delays, as well as customer experience and compliance concerns.

Industry commenters were generally unanimous in recommending a switch-over date that avoids the months of November through April since resources at that time of year would be heavily engaged with RRSP season [ sales ] activity, year-end trading and financial reporting. Therefore, an early summer change-over period would be preferable since it would be the least disruptive from an operational standpoint.

For telephone sales, one commenter told us that pre-sale delivery of the Fund Facts has the potential to create a negative investor experience. In such circumstances, it was suggested that dealers should be permitted to inform the clients that they can receive the Fund Facts within two days of the purchase rather than the onus being in on the investor to initiate the request

One commenter also suggested that dealer representatives be permitted to ask their clients for annual instructions or standing instructions in a manner analogous to the continuous disclosure process in National Instrument 81-106 --Investment Fund Continuous Disclosure. Alternatively, the opt out could be in the form of a declaration (e.g., a clause in the account agreement subject to annual renewal in writing) or an acknowledgement upon the purchase of a mutual fund that the investor will be responsible for getting the most recent copy for the Fund Facts prior to any new trade instructions to the dealer representative.

One commenter noted that the verbal disclosure would take approximately six minutes without taking into account additional time that might be needed to answer any questions the investor may have. This would be even more so when an investor purchases several funds at the same time. Moreover, in the case of investor-initiated trades, especially by seasoned investors, this mandatory verbal disclosure will amount to an annoyance and delay and fee-only dealer representatives will have to charge the investor.

One commenter also expressed concern that the limited number of third party service providers to facilitate implementation could place industry members at financial risk as they will negotiate contracts with a "virtual monopoly", which may result in a "concentration risk in outsourcing".

One commenter noted that the pre-sale delivery of the Fund Facts is proceeding without assurances that investors will realize costs savings. Operational savings from the cessation of prospectus distribution to investors may lead to material profits for fund companies, while the dealer representatives pay for the bulk of pre-sale delivery costs.

Some commenters lauded the removal of the previously proposed requirement to bring the Fund Facts to "the attention" of the purchaser, which was viewed as an unclear requirement that could have potentially added unnecessary costs and confusion for dealer representatives and investors.

We could go on ,but the evidence is clear. A sales mindset and culture is in place trying to masquerade as a professional wealth management/ advisory business. Until this changes, investors will be at risk .That is precisly why investor advocates are demanding increased “advisor” ( the misleading title used by the industry to portray dealer representatives) proficiency and a fiduciary standard. It's now up to regulators to bring in needed reforms or investors to implement Caveat Emptor and ignore all the industry hype about the value of advice.

Let us all hope that 2015 will see some leaders emerge and transform the industry to a trusted one – one that is sorely needed by most retail investors.