Denison’s legacy: fee changes

December was not a good month for Canada’s mutual fund industry. The market timing scandal that had been simmering all through the summer and fall finally exploded with huge fines being levied against four fund companies, three big bank brokerages, and Investors Group Financial Services.

And there may be more to come as the Ontario Securities Commission continues to investigate a handful of other firms, including giant Franklin Templeton Investments.

It’s a wake-up call for an industry that has experienced large-scale redemptions in the past year in a belated response to the bear market of 2000-2002 and low interest rates, which have prompted investors to dump money market funds.

One company that has not been touched by the scandal, at least so far, is Fidelity Investments Canada. That made it possible for the Canada Pension Plan Investment Board to appoint Fidelity’s president, David Denison, as its new CEO. He’ll take over from the retiring John MacNaughton in mid-January.

Clearly, such a move would have been impossible if Fidelity Canada had been tainted by the scandal (although it should be noted that the company’s Boston-based parent has come der scrutiny in the U.S.). The CPP Investment Board is a Crown corporation and the Liberal government, still reeling from the sponsorship scandal, must exercise the utmost discretion in selecting its boss.

What Ottawa may not realize, however, that while Denison’s reputation is untarnished, he has a tendency to stir the pot. In fact, he leaves a growing controversy behind in the fund industry as he departs.

It’s all about the fees
In late November, Fidelity Canada announced across-the-board cuts on the management fees it charges on all its funds. The decision was Denison’s brainchild and he aggressively moved it to the top of his agenda. It may be no coincidence that the announcement was made just three weeks before his departure was revealed.

The result of Fidelity’s unilateral action is to reduce the management expense ratio (MER) on its equity funds by about 0.2 per cent and on fixed-income and money market funds by about 0.3 per cent.

That may not appear impressive at first glance, and on the equity funds it isn’t. But with interest rates looking like they will remain low for several months, a reduction of 30 basis points on a bond fund is significant. On a money fund, it is huge.

Next page: Will investors move to major companies?

Since the news was released, the other major fund companies have been trying to assess whether they should respond and, if so, how. No one wants to reduce fees if they can possibly avoid it since those dollars will come right off their bottom line and flow to their investors instead.

Of course, investors would welcome such a gift. But unless the result is to attract more money to the industry, the shareholders of the fund companies would lose out – and could become rather testy as a result.

Will investment patterns change?
So would lower fees attract more investors to the major companies? Frankly, I doubt it. Although high fund fees have been a favourite target of the media in recent years, I have not sensed a rebellion against them on the part of ordinary investors.

After all, there are plenty of low-fee house they could turn to (e.g. Saxon, Chou, PH&N), yet they all remain relatively minor players.

Moreover, the big fund companies can’t make deep enough cuts in their equity fund costs to make a major difference. That’s because a large percentage of the expenses goes towards paying commissions and trailer fees to the financial advisors on whom they rely to sell their products. So the companies are trapped in a vicious circle of their own making.

David Denison’s legacy is to have made the first big move towards forcing the industry to take a fresh look at itself and the way it does business. Now that he is leaving, it remains to be seen if anyone else will pick up his standard.