Early in July, Rob Carrick of The Globe and Mail reported an alarming e-mail directed at mutual fund salespeople (aka “investment advisers”). The e-mail encourages advisers to maximize their commission and fee revenue by selling deferred sales charge mutual funds (which have high redemption fees that effectively lock investors in for five years) and products that pay 1.25 percent annual trailing commissions to the adviser for the sale.
While the company responsible for the e-mail has stated that the e-mail was unauthorized, the e-mail highlights significant problems inherent in the industry’s predominant business model. Instead of product manufacturers competing to provide investors with the best value for the lowest cost, they compete to provide the front-office “advisers” with the highest fees, in order to encourage them to push these products. Ultimately, this burns investors, who end up paying the advisers’ fees through their mutual fund expenses and this, in turn, directly reduces their investment returns.