On October 22, 2015, the Canadian Securities Administrators (CSA) published the results of a study aimed at determining whether sales and trailing commissions have an impact on mutual fund sales and whether the use of fee-based or commission-based compensation affects the nature of advice and investment outcomes.
Some of the findings of the study are as follows:
- Mutual funds with stronger performance attract more sales. However, the study found that the impact of past performance on future sales is mitigated when fund manufacturers pay sales and trailing commissions. Funds with trailers were found to experience increased sales regardless of performance and the greater the trailer fee, the greater the level of net flows.
- A permanent increase in trailer fees was generally found to be followed by a drop in performance. Similarly, funds that permanently decreased their trailer fees generally corresponded to an increase in performance.
- Mutual fund sales purchased through fee-based accounts were found to be influenced by past performance. Generally, the study found that funds that have sales that are more sensitive to past performance tend to have better future performance over time.
- Funds which receive higher levels of sales from affiliated dealers tend to perform worse over time.
The study was authored by Professor Douglas Cumming, Sofia Johan and Yelin Zhang of the York University Schulich School of Business. It was based on a data voluntarily provided by 43 mutual fund manufacturers which collectively manage about 67% of mutual fund assets and 51.5% of fund of fund assets in Canada and covered the period from 2003 to 2014.
The study follows the Brondesbury Group’s research report entitled “Mutual fund Fee Research Report" and, together with Professor Cumming’s research will be among the factors used by the CSA to determine whether policy changes are necessary. Regular readers will recall that the CSA’s study of investor protection issues arising from mutual fund fee structures began with CSA Discussion Paper and Request for Comment 81-407 Mutual Fund Fees published on December 13, 2012.
For further information, please see "A Dissection of Mutual Fund Fees, Flows and Performance".