Potential Ban on Mutual Fund Commissions

[Slava]

This is quite interesting and would have an enormous impact on the financial services industry. The language from the regulator here is really interesting as well; this is more than just a ban on some types of commissions, but instead appears to be a full ban of commissions. This would mean that consumers would negotiate fees directly for each purchase (I guess...nothing is certain as of yet)

http://business.financialpost.com/le...n-mutual-funds

[MillerTime GFG]

Wow, very interesting. Any sort of timeline on this to your knowledge? Seems to be just a discussion right now.

[Slava]

Its been in the works for a while, and I think originally they were going to report in February 2015. That was pushed back to this past February, and this came out today. So the plan appears to be to gather info and produce a report this fall and recommend action from there .

Its a radical move though, and from a consumer point of view an interesting one. I do a fair amount of flat fee work and people have a mixed reaction to be honest. I have had people flat out tell me they would rather pay more money for a hidden fee as opposed to a disclosed fee. That is in direct opposition to the direction that the regulator's want to move here, and for good reason in my opinion.

[Johnny199r]

This would be very interesting. I think there's a lot of merit in flat fee investing advice, especially for newbies.

However, with DIY ETF indexing getting bigger and bigger and a few direct mutual fund companies who aren't terrible like Mawer still out there, I wonder if many people out there are starting to question the value of their advisor and the 2-3% MER they pay every year...

[Slava]

Well it's really a much more interesting conversation in the sense that plain passive indexing is also a call on the overall market. It's easy to say "just buy the index", but let's pretend that you're in Calgary. Which index? I've written before about the fact that when Sharpe was formulating the buy the index approach he was talking about a global market, and the truth is that is not that simple to replicate. Then you have exposure to bonds (if you want it, and if you should have it), and how best to gain that exposure.

And then there is a factor where you have to consider that these indexes are almost pure momentum plays. So if you want to get into a more thorough discussion, it's more than just "hey this is cheap and I can do it by myself", because there is more to consider.

I could go on...But it's Christmas Eve!

[Johnny199r]

I'm talking about a Canadian couch potato portfolio. Globally balanced.

Obviously the logic being actively managed can't beat passive long term, especially net fees.

[Slava]

Originally Posted by Johnny199r

I'm talking about a Canadian couch potato portfolio. Globally balanced.

Obviously the logic being actively managed can't beat passive long term, especially net fees.

The truth is that those portfolios are active. They're "buy and hold" portfolios, but still active. Basically what you have there is someone has made a market call (and here is the 2015 link so you know that it's not just me saying this: http://canadiancouchpotato.com/2015/...lios-for-2015/)

Sorry if you don't want to get this far in detail and I will try to be brief, but I really do love this stuff and love talking about it! In that link, I in particular want to draw your attention to this line, which kind of summarizes my point about active and passive investing.

Each option now includes several different asset allocations, ranging from conservative (70% bonds and 30% stocks) to aggressive (10% bonds and 90% stocks). The older model portfolios were all 40% bonds and 60% stocks, the traditional mix in a balanced portfolio.

Here's the issue with this. The passive investment can't be several different things. If it's truly passive you can't be making asset allocation decisions and allocating your investments in the first place. But delving deeper into that line of thinking, why did the passive model change here from the 40/60 mix he was advocating to the range? It's just not purely passive as the marketing would have you believe. How does an investor know when to make that switch? How does that proprietor of the strategy make the decision to offer a variety of the passive portfolio? It's just in direct contradiction to the point of passive investing.

The other point that I want to make here is that while indexes have their place, if you've already decided to make these exceptions and invest "a little bit" active to do you passive investing (I mean to be fair calling entire swaths of asset allocation, complete with full re-allocating and changing the funds entirely because you've found something you prefer elsewhere is far from "a little bit", but sure we can use that). But let's say you're willing to make that exception and call this passive. Why not add the extra little bit of asset allocation and just buy stocks as a proxy for the markets you want to represent? The MER in doing so is 0, which is almost assuredly cheaper than the MER for the indexes here, even if they are Vanguard and iShares. You're already rebalancing and trading ETFs under this plan anyway, so how far is the leap and just admitting that its a buy and hold strategy with asset allocation?

I give the gentleman running CCP full credit though; he's at least pursuing the CFP. There are dozens of others online who seemingly have no qualifications in personal finance or finance at all who are selling their strategies. At least he's making the effort and running his practice.

[Johnny199r]

I don't think adjusting your allocation, ie reducing equities as you near retirement, or rebalancing to maintain your asset allocation necessarily changes the premise of passive vs active investing. The basic tenant of ETF investing is simple, hands off, buying an index. Over time, a very small percentage of managers have beaten the index. Why take the chance when you can just track the index for dirt cheap, over time? Stock markets have always gone up (with the exception of some countries, like Japan), is it possible that U.S and Canada and whatever other countries will have negative results in the coming decades? Maybe, but can active managers do better than the indexes? I dont think so. Stock picking is much riskier for the average non professional.

I like Warren Buffet's advice:

http://time.com/money/4169856/warren...tirement-plan/

[Slava]

Well its definitely active because its asset allocation. I love Buffett, and I expect with him beating the hedge funds in the bet he made about a decade ago now you're going to hear a lot about this topic from him this year. So here we go, one topic at a time:

A) Just buying ETFs isn't passive. I don't know what the count would be, but there are thousands of ETFs for all different types of investing. Some are specifically for hedging and some are for very specific sectors. I have seen evidence of very short holding periods for some ETF holders as well (3.5 days at times), which can't be considered passive. There are a lot of decisions to be made to buy these, and I'll address some of those below.

B)Adjusting your allocation and reducing equities is absolutely active as opposed to passive. Changing your allocation from say the US to Europe isn't passive, and it doesn't become passive just because you do that with ETFs. You're making an active call on the markets.

C) Beating the market is a whole other topic. Firstly, is beating the market actually meaningful? Which market? If you're in Canada and the point is to beat the TSX does that mean that you can hold the S&P or Europe or Emerging Markets and do that job? I don't think so. And why do we care about the beating the S&P 500 or Dow Jones in the first place? Because its on the news or BNN all the time? I don't think that matters at all. Basically my opinion is that they became benchmarks basically by accident. They're on the news and people see them, so we compare to them. Matching them less fees or beating them doesn't mean you have enough to retire, or can generate a proper retirement income though; it's just a figure we see regularly.

And of course, it has to be said that using ETFs you will never beat the market. You will get a return that matches the index you're tracking less the transaction costs and MER. Those fees vary and some are not as cheap as you might hope. It's true that they are largely cheaper than mutual funds, but more expensive than stocks. Proponents love to compare the fees to mutual funds but seem to fail to mention that while the MER on mutual funds is higher, there is none at all for stocks.

D) Then I feel the need to talk about the oft-cited Warren Buffett advice to buy the index. You can do that for sure, and frankly I'm a little hypocritical as I have a lot of my clients in ETFs (although I would define it as active as opposed to passive). But of course it has to be noted that Buffett doesn't do that. Why not? It's cheaper to hold his stock than an ETF and he beats the market consistently. It's arrogant to suggest that he is the only person who can do it; and just not true in my opinion. At any rate, why not just buy Berkshire Hathaway?

E) and this might be the most important. Which index? So Buffett says that he would just buy the S&P 500. Great. Does that apply for a Canadian? I would suggest that the currency might temper your enthusiasm at this point because a rise in the CAD/USD over the coming years will eat into your return. So are you going to hedge that? At some point then you might want to remove that hedge...another active call. And of course you're absolutely going to want to allocate between Canada/US/Europe/EM/Rest of the World and then with bonds in the mix as well, presumably reducing the risk of this portfolio as you age. That is active call after active call now. And when you finally get there, in your retirement, you are going to want to generate income from this. That's not a concern for Buffett because he still works and gets paid to this day. Not everyone plans on working until their last day though, so income, becomes a concern.

I better mention that I am a huge follower of Buffett and have probably read around 20 books on him, his investing style and I definitely understand his methods. I'm a long-term Berkshire shareholder, personally, and I've been to the AGM more than once. I've heard the "buy the cheap index" advice in person. But the truth is that approach isn't for everyone.

[heep223]

Anybody who is paying a PM 100bps+ to try and pick stocks to beat a market index, in developed markets of stocks and bonds, is ignoring a lot of research and data. Even worse than that is paying a stockbroker to manage your portfolio, who doesn't have a fiduciary duty to put your interests before his own interests. There is one US Equity mutual fund in Canada that has beat the S&P 500 over the past 5 years. One. This is only the beginning as well, as markets continue to get more and more efficient.

You can buy the US stock market for 3 basis points.

[pseudoreality]

You can debate whether rebalancing an ETF portfolio is active or not, but the fact remains that no one has a good argument on why a person should pay a fund manager huge, often hidden, fees to fail at trying to beat the market.

[Slava]

Originally Posted by heep223

Anybody who is paying a PM 100bps+ to try and pick stocks to beat a market index, in developed markets of stocks and bonds, is ignoring a lot of research and data. Even worse than that is paying a stockbroker to manage your portfolio, who doesn't have a fiduciary duty to put your interests before his own interests. There is one US Equity mutual fund in Canada that has beat the S&P 500 over the past 5 years. One. This is only the beginning as well, as markets continue to get more and more efficient.

You can buy the US stock market for 3 basis points.

Well the fact is that no one is paying that kind of money and not getting other services as well. Unfortunately the people paying those kinds of fees and getting nothing with it are using discount brokers on their own and buying mutual funds.

The other point is that its not all about market efficiency either. It also has a lot to do with the risk adjusted return.

Originally Posted by pseudoreality

You can debate whether rebalancing an ETF portfolio is active or not, but the fact remains that no one has a good argument on why a person should pay a fund manager huge, often hidden, fees to fail at trying to beat the market.

I don't think that rebalancing an ETF is active though. I just think that the choices as well as the asset allocation is much more of an active choice than what some would have you believe. Rebalancing is just that, and that isn't active.

And as an aside, those fees are far from hidden. There are some remaining with certain products (segregated funds, closed end mandates and things like that), but mutual fund fees are completely disclosed.

I should also add that those fees aren't in place specifically to beat the market. I don't even know which market you would be trying to beat?

[pseudoreality]

I'm not trying to beat any market. Meeting the index works just fine for me. I disagree about the fees not being hidden. I've sat down with many financial advisors and all they do is go through a planning checklist prior to pushing high fee mutual funds based on your level of risk. The MER's are in the fine print, but not one has specifically pointed it out to me or told me how much he or she gets out of selling me that product.

I guess for me, I don't like the model of financial planners getting compensated based off of pushing high fee/low performing mutual funds. That would kind of be like if doctors were compensated based on a percentage of the price of a brand name drug when there are cheaper generics or non-drug treatments that would be more effective for the patients. I think professionals should get paid for the service they provide and not kickbacks.

[Slava]

Originally Posted by pseudoreality

I'm not trying to beat any market. Meeting the index works just fine for me. I disagree about the fees not being hidden. I've sat down with many financial advisors and all they do is go through a planning checklist prior to pushing high fee mutual funds based on your level of risk. The MER's are in the fine print, but not one has specifically pointed it out to me or told me how much he or she gets out of selling me that product.

I guess for me, I don't like the model of financial planners getting compensated based off of pushing high fee/low performing mutual funds. That would kind of be like if doctors were compensated based on a percentage of the price of a brand name drug when there are cheaper generics or non-drug treatments that would be more effective for the patients. I think professionals should get paid for the service they provide and not kickbacks.

Well I am a financial planner (CFP) who doesn't just push mutual funds. I use funds sparingly overall, but there is a time and place where they're the best option.

I do find that general view of the industry discouraging though because there are some advisors who are doing that, and they're in general doing a disservice to the industry as a result. I don't know when you met with advisors, but over the past couple of years rules surrounding disclosure have changed significantly. People are made aware of exactly what the fees and costs are, and this is tightly regulated. That disclosure applies specifically to mutual funds and in my practice I disclose as much as possible regarding fees and commissions.

And meeting the index is fine. I have a lot of clients who are in ETFs and I use them a lot, so my point isn't that people should 3% for a foreign mutual fund. I just hear all the time that people should just "buy the index" which I think is a little misleading. Its great for someone like heep above with a CFA to say that no one needs an advisor or advice, but its incredibly unrealistic. And I also think that there is something significantly different between buying the index and letting the chips fall where they may in the accumulation phase and its something completely different when you're now going to move from that to relying on it for income. At that point in particular a lot of people want and need advice on how to structure things, and how to make sure that when its time to buy groceries the money is in the account. I also see a lot of people in that group, or nearing it, who want this looked after and don't want to do it for themselves. They have finished working and its time to enjoy life, which for them is something different than worrying about what the markets are doing.

Again for the guys like Buffett who continue working and have billions this isn't a concern. But those aren't the type of people who are clients of mine anyway!

[heep223]

Originally Posted by Slava

Well I am a financial planner (CFP) who doesn't just push mutual funds. I use funds sparingly overall, but there is a time and place where they're the best option.



I do find that general view of the industry discouraging though because there are some advisors who are doing that, and they're in general doing a disservice to the industry as a result. I don't know when you met with advisors, but over the past couple of years rules surrounding disclosure have changed significantly. People are made aware of exactly what the fees and costs are, and this is tightly regulated. That disclosure applies specifically to mutual funds and in my practice I disclose as much as possible regarding fees and commissions.

The majority of advisors and brokers are not qualified to give financial advice. 95% of registrants in Canada are registered as salespeople. The entire industry is designed around the wrong incentives that put sales people interests ahead of investors. It shouldn't be such a huge step to have advisors actually disclose what they're being paid. When you're getting paid higher trailers on one product over another, that right there destroys any semblance of alignment. Combine that with the fact that advisors and brokers don't have a legal obligation to put their clients interests ahead of their own. There's a suitability standard but it's so loose and vague that most just ignore it.

You shouldn't be able to take a few CSI courses and immediately be able to call yourself a financial advisor. Our investment advice industry is a disaster tbh. I don't know why people aren't more pissed off about it in general but my guess is that most don't even know what questions to ask. It's become an industry filled with people trying to justify their own existence. Fascinating to watch really.

With the emergence of low cost indexing and self directed investing we are seeing a great democratization of the industry and it's only now just beginning. Now we're seeing the ugly truth about stock picking in highly efficient markets.

[Slava]

Originally Posted by heep223

The majority of advisors and brokers are not qualified to give financial advice. 95% of registrants in Canada are registered as salespeople. The entire industry is designed around the wrong incentives that put sales people interests ahead of investors. It shouldn't be such a huge step to have advisors actually disclose what they're being paid. When you're getting paid higher trailers on one product over another, that right there destroys any semblance of alignment. Combine that with the fact that advisors and brokers don't have a legal obligation to put their clients interests ahead of their own. There's a suitability standard but it's so loose and vague that most just ignore it.

You shouldn't be able to take a few CSI courses and immediately be able to call yourself a financial advisor. Our investment advice industry is a disaster tbh. I don't know why people aren't more pissed off about it in general but my guess is that most don't even know what questions to ask. It's become an industry filled with people trying to justify their own existence. Fascinating to watch really.

With the emergence of low cost indexing and self directed investing we are seeing a great democratization of the industry and it's only now just beginning. Now we're seeing the ugly truth about stock picking in highly efficient markets.

I agreed with basically everything that you said here, right up until the last paragraph. I would love nothing more than a much higher standard for people to hold themselves out as advisors. I do find it crazy that people have business cards that match mine despite my having the degree, CFP and 2/3 of the CFA (soon enough to be a charterholder...) But there isn't much I can do about that. I do think that there are significant issues, and you've at least brushed on them there.

The one major consideration is that good advisors do so much more than just invest for their clients. There is no question that this is a significant portion, but its far from the only thing. And I don't think that magically everyone will just start indexing and call it a day. If anything the waters are getting murkier with everyone and their dog offering "smart beta" solutions complete with great looking back-testing. Mutual fund companies aren't about to sit back and watch money flow away in Canada like it has in the US either; they're bringing out active ETFs with mutual fund equivalents.

I think that there is a significant place for good advisors. Clearly I have a bias there, because its my profession. But the truth is there are a lot of people who need help with these areas, and they need people who are qualified, honest and trustworthy.

[Johnny199r]

I wish high schools would teach a basic investing course.

[Slava]

Originally Posted by Johnny199r

I wish high schools would teach a basic investing course.

So do I! In fact, I would love to teach one myself and have toyed with putting one together. Just a non-bias, non-product related investing course. I think it would be very popular and very useful.