Published: July 09, 2025
TORONTO — A regulator-led survey of Ontario mutual fund dealers based out of big banks shows a sizable minority are not always acting in the interest of clients.
The survey of close to 3,000 dealers by the Ontario Securities Commission and the Canadian Investment Regulatory Organization found that 25 per cent say they have at least sometimes recommended products or services to clients that are not in their interest.
OSC chief executive Grant Vingoe says the results of the survey show sales pressures and compensation incentives may be driving concerning behaviour.
The regulator launched the study in response to a CBC investigation last year that alleged bank sales targets were leading dealers to pressure customers to sign up for financial products they didn’t need.
The survey found 23 per cent of dealers agreed there is high pressure to sell potentially unneeded products or services, while 60 per cent disagreed with the statement.
The OSC says next steps in its review include learning more about the sales practices in place at banks, and understanding the controls dealers have to address any material conflicts of interest.
This report by The Canadian Press was first published July 9, 2025.
The survey of close to 3,000 dealers by the Ontario Securities Commission and the Canadian Investment Regulatory Organization found that 25 per cent say they have at least sometimes recommended products or services to clients that are not in their interest.
OSC chief executive Grant Vingoe says the results of the survey show sales pressures and compensation incentives may be driving concerning behaviour.
The regulator launched the study in response to a CBC investigation last year that alleged bank sales targets were leading dealers to pressure customers to sign up for financial products they didn’t need.
The survey found 23 per cent of dealers agreed there is high pressure to sell potentially unneeded products or services, while 60 per cent disagreed with the statement.
The OSC says next steps in its review include learning more about the sales practices in place at banks, and understanding the controls dealers have to address any material conflicts of interest.
This report by The Canadian Press was first published July 9, 2025.
Opinion
Jackson: How mutual fund managers fleece investors through ‘closet indexing’
By Dale Jackson
Published: July 11, 2025
No way to know for sure
The opportunity for closet indexing exists under a veil of secrecy because mutual fund companies are not required to disclose a heck of a lot about their portfolio holdings. Most fund providers will post a few top holdings and their weightings every few months but it’s almost impossible for average investors to get an accurate, up-to-date, picture.
The asset class most ripe for closet indexing is Canadian focused equity funds – a staple in almost every retirement portfolio. The top holdings disclosed in just about every fund in the category include the same big Canadian banks, telcos and resource-related companies that make up the S&P/TSX Composite Index. There aren’t a lot of choices for active managers who want to deviate from the index.
Some actively managed Canadian equity funds outperform the index over the medium and long-term even after fees are stripped out, but most do not.
Bay Street’s dirty little secret
So, why would your trusted investment advisor recommend a Canadian equity mutual fund over an ETF? Better yet, why not just buy the few big TSX-listed stocks directly?
The answer is rooted in how that advisor is compensated. In most cases, a commission, or “trailer fee,” is baked into the MER. It is an annual reward from the mutual fund company to the advisor for choosing their fund for the client.
The trailer fee can vary but is normally about one per cent of the total amount invested. In a $500,000 portfolio of mutual funds the trailer fees would add up to $5,000 each year for the advisor.
Officially, the trailer fee is intended to compensate the advisor for “ongoing advice” but there is always the temptation for that advice to be for the client to remain in the fund that gives the advisor the highest commission.
How to avoid a closet indexer
In some cases, the person you think is an advisor is actually a mutual fund vendor who is only qualified to sell mutual funds. Regulators are working toward a formal definition but for now just about anyone can call themselves an advisor.
The best advisors are qualified to invest in anything; mutual funds, ETFs, stocks, bonds, options and more. Qualified, experienced, advisors are familiar with the best mutual fund managers who actually manage their portfolios and can determine when, or if, an ETF or direct investment is a better option.
Dale Jackson
Columnist, BNNBloomberg.ca
Jackson: How mutual fund managers fleece investors through ‘closet indexing’
By Dale Jackson
Published: July 11, 2025
On Tuesday, Calgary resident Shelley Runkvist turned a $10,000 winning Big Spin ticket into $350,000.
(Photographer: Brent Lewin/Bloomberg) (Brent Lewin/Bloomberg)
In February, the British Columbia Court of Appeal granted certification for a class action lawsuit against HSBC alleging misrepresentation of mutual fund management.
The proposed class action claimed HSBC marketed its mutual funds as “actively managed” while allegedly employing a “closet indexing” strategy.
Closet indexing is an under-the-radar practice where mutual fund managers claim to be actively managing the individual holdings in their portfolios but are merely duplicating the underlying index.
It allows them to post returns comparable to the index, while reaping big fees. Annual fees on equity mutual funds, expressed as the management expense ratio (MER), often exceed two per cent of the total amount invested.
In comparison, annual fees on market weighted exchange traded funds (ETFs), which track their indices directly, are often well below half of a per cent.
Most Canadians save for retirement through mutual funds because they are the only way for average investors to access a diversified, professionally managed portfolio.
But mutual fund fees can add up to thousands of uninvested dollars, which could have compounded into hundreds of thousands of dollars over time.
The allegations have not been proven in court, and HSBC is far from the only mutual fund provider accused of closet indexing.
In February, the British Columbia Court of Appeal granted certification for a class action lawsuit against HSBC alleging misrepresentation of mutual fund management.
The proposed class action claimed HSBC marketed its mutual funds as “actively managed” while allegedly employing a “closet indexing” strategy.
Closet indexing is an under-the-radar practice where mutual fund managers claim to be actively managing the individual holdings in their portfolios but are merely duplicating the underlying index.
It allows them to post returns comparable to the index, while reaping big fees. Annual fees on equity mutual funds, expressed as the management expense ratio (MER), often exceed two per cent of the total amount invested.
In comparison, annual fees on market weighted exchange traded funds (ETFs), which track their indices directly, are often well below half of a per cent.
Most Canadians save for retirement through mutual funds because they are the only way for average investors to access a diversified, professionally managed portfolio.
But mutual fund fees can add up to thousands of uninvested dollars, which could have compounded into hundreds of thousands of dollars over time.
The allegations have not been proven in court, and HSBC is far from the only mutual fund provider accused of closet indexing.
No way to know for sure
The opportunity for closet indexing exists under a veil of secrecy because mutual fund companies are not required to disclose a heck of a lot about their portfolio holdings. Most fund providers will post a few top holdings and their weightings every few months but it’s almost impossible for average investors to get an accurate, up-to-date, picture.
The asset class most ripe for closet indexing is Canadian focused equity funds – a staple in almost every retirement portfolio. The top holdings disclosed in just about every fund in the category include the same big Canadian banks, telcos and resource-related companies that make up the S&P/TSX Composite Index. There aren’t a lot of choices for active managers who want to deviate from the index.
Some actively managed Canadian equity funds outperform the index over the medium and long-term even after fees are stripped out, but most do not.
Bay Street’s dirty little secret
So, why would your trusted investment advisor recommend a Canadian equity mutual fund over an ETF? Better yet, why not just buy the few big TSX-listed stocks directly?
The answer is rooted in how that advisor is compensated. In most cases, a commission, or “trailer fee,” is baked into the MER. It is an annual reward from the mutual fund company to the advisor for choosing their fund for the client.
The trailer fee can vary but is normally about one per cent of the total amount invested. In a $500,000 portfolio of mutual funds the trailer fees would add up to $5,000 each year for the advisor.
Officially, the trailer fee is intended to compensate the advisor for “ongoing advice” but there is always the temptation for that advice to be for the client to remain in the fund that gives the advisor the highest commission.
How to avoid a closet indexer
In some cases, the person you think is an advisor is actually a mutual fund vendor who is only qualified to sell mutual funds. Regulators are working toward a formal definition but for now just about anyone can call themselves an advisor.
The best advisors are qualified to invest in anything; mutual funds, ETFs, stocks, bonds, options and more. Qualified, experienced, advisors are familiar with the best mutual fund managers who actually manage their portfolios and can determine when, or if, an ETF or direct investment is a better option.
Dale Jackson
Columnist, BNNBloomberg.ca
No comments:
Post a Comment