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How the Ontario government has betrayed investors

What in the world is Vic Fedeli thinking?

In case you don’t recognize the name – and most people won’t – he’s the still-wet-behind-the-ears Finance Minister of Ontario.

CARP, which represents Canada’s 50-plus community, has expressed “grave concerns” over Vic Fedeli’s decision to block a proposed ban on certain fund fees.
CARP, which represents Canada’s 50-plus community, has expressed “grave concerns” over Vic Fedeli’s decision to block a proposed ban on certain fund fees.  (COLE BURSTON / THE CANADIAN PRESS)

He hasn’t even been in office three months and is presumably still trying to catch up on all his files. But he thinks he knows enough to shoot down six years of work by Canada’s securities regulators while at the same time making a mockery of his party’s “For The People” slogan.

Let me back up a little here. When it comes to regulating our securities industry, Canada is a patchwork quilt of jurisdictions. Each province and territory has its own securities commission or the equivalent, with different priorities and dynamics. The federal government has been trying for years to combine them into a coherent national securities regulator, with zero success. No one wants to relinquish their fiefdom.

But they all get together under an umbrella organization called the Canadian Securities Administrators (CSA) in an effort to harmonize the country’s rules relating to capital markets to the extent possible.

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One of the issues the CSA has been working on in recent years is updating our hidebound mutual fund industry and reducing the costs to investors. Those costs are among the highest in the world.

Finally, after six years of debates, consultations and arguments, the CSA seemed to have arrived at some solutions that would significantly benefit investors. Then, out of nowhere, Fedeli shoots it all down.

On Sept. 13, the CSA put forward a plan for public comment that would end what it terms the “conflict of interest” in deferred sales changes (DSC) on mutual funds and terminate the practice of forcing investors to pay fat fees for “advice” that they never receive.

Almost immediately, Fedeli issued a statement dumping cold water on the whole idea. He claimed that, if implemented, it “will discontinue a payment option for purchasing mutual funds that has enabled Ontario families and investors to save towards retirement and other financial goals.”

Really? This rationale is so twisted, and so out of line with Premier Doug Ford’s populist agenda, that you have to wonder what vested interests have been whispering in Fedeli’s ear. There are all kinds of cheaper investment options out there, ranging from no-load mutual funds to ETFs.

Deferred sales changes seem attractive at first glance. You pay nothing up front to buy mutual fund units. However, if you sell within a certain period of time – usually five to seven years depending on the company – you’re hit with a sales commission, which can be as high as 6 per cent.

If you’re a financial adviser, you love selling DSC funds. You get an upfront commission on the sale of as much as 5 per cent, plus you earn annual trailer fees of 0.25 per cent to 1.5 per cent for as long as the client owns the fund. Those trailer fees are effectively deducted from any profit an investor earns. Even more frustrating, you still have to pay them even if the fund loses money.

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If a security is performing badly, most people will consider selling. But in the case of DSC funds, there’s a major disincentive to bailing out – the sales charge such action would trigger.

When you boil it down, the only people who are guaranteed to make money in this scenario are the advisor and the fund company.

Another abuse the CSA wanted to address was the payment of trailer fees to discount brokerage firms. Discount brokers are not allowed to offer advice to clients – they can’t suggest you buy or sell any specific stock or fund. Trailer fees are supposedly paid to compensate an advisor for advice offered. If there is no advice, therefore, the investor is paying for nothing.

Questrade is the only discount broker that rebates all trailer fees (less a $ 29.95 monthly processing fee) to their clients, having implemented the practice in 2009. The rest keep the money, and the client is the poorer for it.

Opposition to Fedeli’s position is starting to build. CARP, which represents Canada’s 50-plus community and has 300,000 members, released a letter expressing “grave concerns” with the government’s action and urging the minister to change course.

“Without these needed CSA reforms, people, markets and the government will all lose,” the letter said. “Ontarians will not be able to save, invest or fund their retirements effectively. Financial markets will continue to be skewed at a time when efficiency and effectiveness have never been more important.”

Why the Ford government would take this position is a mystery. It flies in the face of everything the Premier claims he stands for. Unless it changes course, the CSA plan is dead since the Ontario Securities Commission is by far the most powerful member of the group.

Fedeli should pay attention to the growing concerns and reconsider his ill-advised opposition to the CSA proposals. Unfortunately, based on the inflexibility we have seen from the Ford government to date, that probably won’t happen.

Correction — Sept. 29, 2018: This article has been corrected from a previous version that misspelled the name of Finance Minister Vic Fedeli.

Gordon Pape is editor and publisher of the internet Wealth Builder and Income Investor newsletters.

TORONTO STAR