Time For Some Changes

Gordon Pape | January 5th, 2012

A senior mutual fund executive talks frankly about what’s wrong with his industry and the changes that are needed.

BY: GORDON PAPE

It’s not often that a senior mutual funds executive airs the industry’s problems in public and calls for changes to be made. But it happened recently when Tom Bradley, the outspoken president of Vancouver-based Steadyhand Funds, outlined five industry practices that he says “desperately” need to change. The occasion was the fifth anniversary of the launch of the Steadyhand funds, which have become a model for simplicity and cost-effectiveness. Here are the five practices he identified.

Reporting. Investors are getting short shrift, he suggested. “The wealth management industry is great at pitching clients on how a new product or fund is going to enhance returns.” What people don’t hear about is the cost of the product, how it performed after the fact, or how it actually fit into their long-term plans. His comment: “I’m quite confident we’ll see improvement here because it can’t get worse.”

No advice, no pay. Mr. Bradley berates the industry for providing “little or no transparency about who is getting paid for what”. Most fund companies (but not his) pay “trailer fees” to advisors, purportedly as compensation for servicing accounts. These can amount to 1 per cent or more annually on the value of fund holdings. One problem, he says, is that “capable advisors who earn their 1 per cent annually are being paid the same as their brethren who are doing nothing more than selling product”. Note: A new proposal from the Canadian Securities Administrators will try to correct this by requiring advisors to inform clients of the dollar cost of the trailer fees they pay each year.

One set of rules. Some products, such as mutual funds, are closely regulated by securities commissions. Others, such as principal-protected notes (PPNs) and hedge funds, are not. “In the bank branches, there are claims made about PPNs that couldn’t be made anywhere else,” he notes. (Some banks are big promoters of these products.) His solution: “The regulators need to catch up to the product proliferation and make some progress towards regulating wealth management as the one big industry that it is.”

RRSP transfers. One of the chronic complaints I hear from investors is the length of time it takes to transfer RRSP assets to a new account at another company. Mr. Bradley agrees and says it is time for the industry to clean up its act. “Firms have proven they can process in-coming money in minutes but claim to need weeks to transfer it out,” he notes. The excuse that it is “prevailing industry practice” doesn’t cut it as far as he is concerned. He wants the regulators to tell the industry that transfer-out times cannot exceed transfer-in time.

Less short term. Mr. Bradley bemoans the industry obsession with short-term results, e.g. quarterly financials. “Even though the most commonly used words in the wealth management industry are ‘long term’, not enough advisors and managers walk the talk,” he says. His advice: Advisors should “ignore the short-term wins (and losses) and stick to longer-term strategies, performance, and wealth creation. If they want their clients to be effective investors, they themselves can’t just be disciplined when it’s convenient to do so.”

I subscribe to all Mr. Bradley’s suggestions and I would add one more: if fund companies insist on paying trailer fees, make them exactly the same for all types of funds. Right now equity funds and funds-of-funds are more profitable for advisors than fixed-income funds. That creates an intolerable conflict of interest, one that needs to be addressed soon.

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