Average fund fees declined following implementation of disclosure rule amendments

Two new research reports from the Canadian Securities Administrators (CSA) examine the investment fund industry’s behaviour and client behaviours following the implementation of the Client Relationships Model Phase 2 (CRM2) amendments to National Instrument 31-103 Registration Requirements Exemptions and Ongoing Registrant Obligations in July 2016.

Investment performance improved 

Although they warn that industry behaviour cannot be directly attributed to the changes, “it is possible that other factors, which we could not practically account for in our analysis, also contributed to the changes,” the report suggests that average fees declined and investment performance improved over the 2013 to 2020 study period.

The asset-weighted average management expense ratio (MER) for exchange-traded funds (ETFs) declined less than was observed in mutual funds. “This finding was anticipated since the MERS and management fees for most ETFs started from a lower baseline level,” they write. 

Investors also moved their assets into funds that charged lower fees during the study period. “These results are in line with the anticipated effects of the CRM2 amendments, which provided investors with better information on the costs and performance of their investments,” the CSA states in an announcement about the publications’ release. They add that the research found no evidence that fund managers or product distributors shifted to products that were not subject to the amendments.

Overall industry behaviour shifting 

“The research findings suggest that overall industry behaviour has been shifting in directions that are consistent with the study hypothesis on the impact of these regulations. The findings also provide evidence that disclosure-based regulations may be an effective tool in changing industry and investor behaviour,” the CSA continues.

The two publications’ titles are: 

• A Post-Implementation Review of The Impacts of The CRM2 Annual Costs and Performance Reports on Investment Fund Fees 
• A Post-Implementation Review of The Impacts of The CRM2 Annual Costs and Performance Reports on Investment Fund Performance 

The CSA also warns that the reports and statements do not represent any official policy position or view.

Direct-to-consumer channel 

Five “notable” changes discussed in the reports, changes which coincided with the CRM2 implementation timeline, include the increasing popularity of fund-of-fund products, growth in the ETF market, continued growth in fee-based mutual fund series sales, the rise of funds with an environmental, social and governance (ESG) mandate and the rise of online advisors – the report notes that the direct-to-consumer channel of distribution emerged in 2014 with the launch of four online advice platforms that year.

“The study period was limited to 2013-2020 to isolate the impact of amendments and reduce the influences of other regulatory and market developments on the analysis,” they write.