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The Voice of Canada’s Investment Funds Industry

Letters to the Editor

To Investment Executive: Cumming research leaves many unanswered questions

February 26, 2016


Re: “Science-denying tactics will do the mutual fund industry no good” (February 22, 2016)

The Investment Funds Institute of Canada (IFIC) finds it ironic that Neil Gross would counsel the investment funds industry to abandon providing any further analysis to the discussion of mutual fund fees. It was IFIC that first strongly pushed regulators to take an independent research-based approach to policy-making — and IFIC that has made many robust contributions to the field.

It must be recognized that every piece of research will have its strengths and weaknesses, limitations and biases. However, every piece of research also brings value and helps to illuminate a part of an issue. We should not dismiss work because it expands upon or provides a different point of view to other research. In fact, we should embrace it because public policy and regulation must govern practices in the real world, where financial decisions follow the rules of emotion rather than pure science.

Douglas Cumming’s research provides useful insights and identifies questions for further analysis. Its limitation is that it’s based on aggregated fund-level data and cannot tell us what happens at the individual account level. It cannot tell us whether the correlations he found result in actual harm to the investor, given all of the other factors that influence financial product purchase decisions. It doesn’t tell us whether one compensation scheme results in less conflict than another. As The Brondesbury Group noted in its report for the Canadian Securities Administrators, there is no such thing as a “behaviourally neutral compensation scheme.”

In addition, Cumming’s work doesn’t tell us anything about the potential impact on investors of regulatory intervention in advisor compensation. Results from decisions in the U.K. to eliminate trailer commissions point to reduced access to advice for low and modest investors. Would that happen here? Would modest investors be willing to pay significantly more for advice under a fee-for-service model? Would unadvised modest investors save less? Does it matter? Will increased disclosure under the client relationship model reforms help investors take disclosed conflict into consideration in their decision-making?

All of these questions — and more — require additional analysis and discussion if policy-makers and regulators are to proceed in a way that serves investors well. IFIC and the investment funds industry have every intention of being part of these future discussions and of continuing to contribute fact-based analysis to the dialogue.

Joanne De Laurentiis
President and CEO
The Investment Funds Institute of Canada

February 26, 2016