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19 Responses to “December 24, 2012”

1. jiHymas says:

   December 25, 2012 at 7:37 pm

   An Assiduous Reader writes in and says:

   We agree with some of your points in your blog esp. that the CSA should be dealing with adviser abuse/ fiduciary duty directly not through trailers. There are a few points though that deserve comment. For instance yoy say:

   “like every other product sold to retail. When I buy a can of beans for $2.49 at the grocery story, I have no say in how that $2.49 is split between the producer, the middlemen and the store itself. Why should I?”

   What I find missing in this analogy is failure to differentiate between simple selling of a product, and the provision of so called “advice, help or professional guidance” on which product is the best to buy. If I am told (by the fund industry itself) that I must seek out the best “advice” before I purchase a product, and I am also told that they are the very best “professionals” with which to seek this guidance, then the act of using hidden portions of the product cost to “incentivize” those professionals to help their own interests, perhaps at the harm to my interests, is not much like buying a can of beans retail. It is more like being full of beans or perhaps using some deception (about the level of “professionalism”) against the financial consumer. Where is the inclusion of thoughts and promises of professional “advice” in this argument? It is, according to the CSA studies, one of the more important elements involved in any investment fund purchase, and it is not found herein.

   Also, The comment: “I assert that it is the regulators, or aggrieved parties, who bear the onus of proving that the fiduciary duty of the portfolio manager has been breached.” Um, no. The law is indeed the opposite way: once the fiduciary duty is established to exist by the client, the advisor (fiduciary) HAS TO PROVE, quite scrupulously, all his or her actions were in the client’s best interest.

   Additionally , I do not think you have read Glorianne’s 1995 and 1998 reports in depth. These report dealt extensively with fees , trailers, DSC and the games played with them.The relevance to the issue at hand is 100%.In the US, trailers are called distribution fees and are capped.

   You are also way off base by saying that fund assets are not used to pay
   trailers.Fund Facts , mutual fund ads/ marketing materials and the Simplified Prospectus say they are.This is the main argument Canadian fundcos defend the world’s steepest MER’s.If they didn’t, we would agree with your logic train.At one time the FEL was dominant and there were no trailers but the rate was so high , fundcos decided to bury it in the management fee.Mutfund sales took off after that “innovation”.

   As you know there is no real fund governance in Canada- the IRC’s are useless.They have no impact on fees and ignore multiple conflicts-of-interest.Unitholders are naked.

   Finally, OSC rules impose a fiduciary duty on fund managers. They must act solely in the Best interests of the fund.Paying trailers to discount brokers who provide no advice or incremental service is robbing fund assets to enhance Fund manufacturer AUM only.Back in 2004 Five Fundcos were forced to return over $200 million to unitholders when they allowed hedge funds to ronb investor returns.The CSA is behind the times in protecting small investors.

   Trailer commissions create conflicts-of-interest for Reps in what to recommend to their clients. Since trailer commissions are higher for Equity and balanced funds than for fixed-income funds, there’s a natural incentive to skew investor portfolios toward equities. This we see all the time- KYC routinely ignored- seniors with 90 % Equity funds.

   Trailers also influence the choice between different providers and the choice of purchase option. The competition for Rep loyalty, through payment of embedded compensation, raises the perception that “mutual fund manufacturers may consider the advisor, rather than the investor, to be their customer, which could lead them to favour the needs of the advisor over the interests of the investors in their mutual funds.” No surprise here at least for the advocacy community. Unsuitable investments are the #1 cause of investor complaints and losse.

   Reps aren’t required to disclose all forms of compensation, such as trailers, that they obtain from clients’ fund investments. If mutual fund costs aren’t discussed with investors, they don’t become a factor in a client’s decision-making despite their critical importance. Higher trailers drive higher fund sales, thus increasing a fundco’s assets under administraion and generating more management fees. This is a conflict-of-interest that appears to be ignored by IRC’s and the CSA.

   We routinely challenge the CSA but on this initiative they are on to something important to Main Street.

   We hope you file a Comment letter with the CSA.

2. jiHymas says:

   December 25, 2012 at 10:26 pm

   This is a long response to a long comment! Quotations from the above comment are in underlined italics, while

   blockquotes are from other documents

   . I hope it’s all legible!

   Where is the inclusion of thoughts and promises of professional “advice” in this argument?<

   [referring to my post of December 18]

   Where is it anywhere? Non-commissioned salesmen have been thought to provide a competitive advantage in auto dealerships and electronics retailers but not so much in retail financial services.

   If you want useful financial advice from a fiduciary, there’s lots of them around.

   You certainly wouldn’t go to most full-service brokerages, because even their analysts – who have all kinds of special rules applicable to them – don’t provide much in the way of useful opinions anyway. Despite all the special rules, that’s not their function. You’re certainly not going to get useful advice from most salesmen, because most of them know nothing about financial markets in the first place.

   The law is indeed the opposite way: once the fiduciary duty is established to exist by the client, the advisor (fiduciary) HAS TO PROVE, quite scrupulously, all his or her actions were in the client’s best interest.

   [alos in reference to my post of December 18]

   I stand corrected – at least as far as civil law in Connecticut is concerned, which I will assume is basically the same as here.

   Therefore, our law presumes that if the fiduciary gained any financial advantage or benefit at the expense of the plaintiff, that benefit or advantage was acquired in breach of the fiduciary duty owed to the principal. As a consequence, the law shifts the burden of proof of (fraud / self-dealing / conflict of interest) from the plaintiff to the fiduciary to prove that the transaction which resulted in benefit to the fiduciary was the product of fair dealing, good faith, and full disclosure. In addition, the fiduciary is required to prove fair dealing and proper conduct by the heightened standard of clear and convincing evidence.

   However, the overall argument is still applicable, because the onus is on the plaintiff to prove that fiduciary duty existed in the first place, which is simply assumed by CSA.

   We can also engage in lots of lovely legalistic hairsplitting over this. The foundation of the CSA argument is s. 2.1 of National Instrument 81-107 Independent Review Committee for Investment Funds which requires the manager of the investment fund to (a) act honestly and in good faith, and in the best interests of the investment fund, and (b) exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

   The hairsplitting arises because even the s. 2.1 of National Instrument 81-107 reads:

   2.1 Manager standard of care

   A manager in exercising its powers and discharging its duties related to the management of the investment fund must
   (a) act honestly and in good faith, and in the best interests of the investment fund; and
   (b) exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

   There does not appear to be any requirement for the manager (as interpreted broadly – the CSA is quite explicit about this) to “look through” the investment fund structure to make changes to benefit specific interested parties.

   The CSA paper on mutual fund fees is actually breaking new ground when it suggests that the manager must be able to demonstrate that it is acting in the best interests of the mutual fund and its investors (bolding added to show the entirely unjustified extension of NI 81-407 by the CSA).

   But why bother with the hairsplitting? All this simply shows that the entire debate was and is simply a new attempt to impose fiduciary duty where none currently exists – the paper should be scrapped and considered a mere subset of the fiduciary-vs-salesman debate.

   Additionally , I do not think you have read Glorianne’s 1995 and 1998 reports in depth. These report dealt extensively with fees , trailers, DSC and the games played with them.The relevance to the issue at hand is 100%.

   Nope, I haven’t read them at all, in fact. No links were provided by the CSA – naturally – but I was able to find copies of the 1995 report and the 1998 report with the help of Mr. Google. Holy smokaramas, you’re talking about nearly 500 pages there! I haven’t the slightest intention of reading them in any depth, unless somebody pays me.

   If there’s anything of particular interest in these ancient manuscripts that you would particularly like me to look at, let me know and I’ll (probably!) look at it. However, having read the relevant section, I stand by my December 18 remark regarding at least one instance of the CSA’s use of Stromberg’s report, my remark being: One reason this is breathtaking is lack of a logical connection between the footnote and the text. Ms. Stromberg was concerned about investment management decisions, which do not have anything to do with the level of fees charged.

   You are also way off base by saying that fund assets are not used to pay trailers.Fund Facts , mutual fund ads/ marketing materials and the Simplified Prospectus say they are.

   Well, I just had a look at the Final simplified prospectus – English for Altamira Preferred Equity Fund, available on SEDAR dated 2012-10-19, and it states quite clearly:

   During its last financial year, which ended on October 31, 2011, National Bank Securities Inc. paid dealers cash compensation as trailing commissions and for other promotional activities representing 17.83% of the management fees it received for all the mutual funds managed by National Bank Securities Inc..

   In other words, it’s just as I said: the fees are not paid with fund assets, they are paid by the sponsor out of their gross revenue.

   As you know there is no real fund governance in Canada- the IRC’s are useless.

   Not useless! They provide a rich source of income for ex-regulators and as such provide a useful reminder of the purpose of regulation.

   Finally, OSC rules impose a fiduciary duty on fund managers. They must act solely in the Best interests of the fund.Paying trailers to discount brokers who provide no advice or incremental service is robbing fund assets to enhance Fund manufacturer AUM only. Five Fundcos were forced to return over $200 million to unitholders when they allowed hedge funds to ronb investor returns.The CSA is behind the times in protecting small investors.

   Discount brokers do indeed provide an incremental service: custody and settlement.

   The market timining fiasco was exploitation of stale prices and permission for late trading, admirably summarized by a Federal Reserve paper titled The Economics of the Mutual Fund Trading Scandal. The Canadian part of this scandal is well summarized by the Globe and Mail.

   And, to continue the legalistic hair-splitting, I note that the AIC Settlement Agreement stipulates that:

   The agreements described in paragraph 17 protected the Relevant Funds from some, but not all, of the costs to those funds of the trading by the Market Timing Traders. Accordingly, the conduct of AIC in failing to protect fully the best interests of the Relevant Funds in respect of the frequent trading market timing was contrary to the public interest.

   There is no mention of fiduciary duty in this conclusion. In fact, the word “fiduciary” does not appear anywhere in the document. When regulators use the phrase “contrary to the public interest”, it means “there is a lot of public interest in this scandal and we have to look like tough guys”.

   Trailer commissions create conflicts-of-interest for Reps in what to recommend to their clients.

   This would be correct if Reps were working for the investor. But they’re not; they are required only to limit their suggestions to “suitable” investments.

   If investors want somebody to work for them, they should hire an actual portfolio manager / investment counsellor who actually does work for them.

   Reps aren’t required to disclose all forms of compensation, such as trailers, that they obtain from clients’ fund investments.

   You claimed earlier that this compensation was from fund assets, which you asserted was specified in “Fund Facts , mutual fund ads/ marketing materials and the Simplified Prospectus”. Make up your mind!

   We hope you file a Comment letter with the CSA

   I’ll be happy to, if you pay me.

3. jiHymas says:

   December 26, 2012 at 3:00 am

   And there’s more! An Assiduous Reader writes in and says … [JH]

   By now you should understand why we want those calling themselves advisers to act in the investor’s Best interests ( they don’t- they need only meet a lowly suitability standard and are registered as dealing Representatives). IFIC portrays them as advisers but they are basically salespersons masquerading as advisers. Some of the titles are awe inspiring.

   Kenmar, FAIR Canada , PIAC and others seek the same goal.

   Canadians are being hosed by the mutual fund industry .

   We also want those responsible for fund governanceNI 81-402 to stop sending fund assets ( trailer commissions) to discount brokers who provide no service to the fund. It is in fact a breach of fiduciary duty

4. jiHymas says:

   December 26, 2012 at 3:03 am

   An Assiduous Reader writes in and says … [JH]:

   Mr Teasdale is a respected industry observer

   Some bloggers are really confused about trailers and should visit this site to get better informed.

   http://moneymanagedproperly.com/new_folder/rights%20and%20abuse/financial%20abuse.htm

5. jiHymas says:

   December 26, 2012 at 3:13 am

   We also want those responsible for fund governanceNI 81-402 to stop sending fund assets ( trailer commissions) to discount brokers who provide no service to the fund. It is in fact a breach of fiduciary duty

   i) They’re not fund assets

   ii) Discount brokerages provide settlement and custody

   iii) You will have to flesh out the breach of fiduciary duty argument a bit more. You should also explain why you have not brought a class action lawsuit regarding the matter.

   Some bloggers are really confused about trailers and should visit this site to get better informed.

   Meaning me, maybe? Oh, the shame of it all! I visted the link quoted and found the following with respect to trailer fees:

   Trailer fees are annual fees paid by a mutual fund company to an investment advisor for recommending the mutual fund. The investor does not need to be told about this even though the money is paid from the investor’s own funds. Likewise the advisor has no obligation to do anything for the client to earn these fees.

   Trailer fees and other referral type fees are an abuse of the client advisor relationship and, unless these fees are disclosed and used to offset valid and identifiable services performed by the advisor, they increase costs and are detrimental to an individual’s financial position.

   The greed of the industry has seriously affected the ability of mutual funds to meet the objectives and needs of the individual. Indeed, the benefits of one of the most efficient investment vehicles ever invented have been submerged under the self interests and costs of an industry that has lost sight of its reason for being

   The investor does not need to be told about this even though the money is paid from the investor’s own funds.

   I believe the investor does have to be told about the payments, whether directly or via the prospectus. Is this not correct?

   In addition, the money is not, in fact, paid from the investor’s own funds. It is paid by the fundco – and there is not necessarily any relationship between the payments with respect to individual accounts and the revenue received from the account, as far as I know. Trailers could exceed the management fee! Trailers could be paid on a grid!

   In fact, I suspect that trailer fee revenue received by the investment brokerage firm from the fundco with respect to each advisor is paid out to the advisor on a grid – I would appreciate hearing from anybody with more information about this.

   the self interests and costs of an industry that has lost sight of its reason for being

   The industry’s reason for being is to make money. Just like every other industry. And the fundcos are good at it!

6. jiHymas says:

   December 26, 2012 at 2:02 pm

   An Assiduous Reader writes in and says:

   http://www.ackerfinley.com/Media/PDF/fundfacts.pdf

   Note the section on trailers

   The client pays for the management fee and the management fee pays for the trailer I agree the word. May. Is a sticking point but the prevailing practice is they do pay the dealer or else nothing would get sold.

   Clear?

7. jiHymas says:

   December 26, 2012 at 2:03 pm

   Clear?

   Yes, very clear, that’s exactly what I’ve been saying. The document states:

   The trailing commission is paid out of the management fees and is 0.5% per annum of the continuing total value of your dealer’s clients’ investment in units of the Fund acquired under either the sales charge option or under the deferred sales charge option.

   Trailers are paid by the fundco from its gross revenue, the same way a food preparation company will pay grocery stores for shelf space out of its gross revenue.

   The investor doesn’t pay anything with respect to trailer fees.

8. jiHymas says:

   December 26, 2012 at 2:33 pm

   An Assiduous Reader writes in and says:

   Here we see the industry lobbyist asserting that mutfunds come bundled with ‘advice’ and that advice has great value

   F class funds not available to retail investors

   I welcome your challenging us but realize we have been at this for over a decade Nevertheless it is healthy dialogue

   We do have class actions on currency exchange fees in rrsp accounts

   As for fundcos paying trailers to discount brokers we have filed a formal complaint with the Ontario Securities Commission. ; no class action needed

   Brokers should charge regular broker commissions to buy sell funds ONCE like any other security or ETF not get one percent for as long as you own the fund.i cannot understand why you do not see the issue re fund governance

   [Redacted by JH]

   https://www.ific.ca/content/content.aspx?id=3728

9. jiHymas says:

   December 26, 2012 at 2:48 pm

   As for fundcos paying trailers to discount brokers we have filed a formal complaint with the Ontario Securities Commission. ; no class action needed

   When was it filed? What is the current status? Can you provide links to the complaint itself?

   I was once told that the OSC gets lots and lots and LOTS of complaints, which range all the way from well-founded allegations of criminal behaviour to a lot of crazy stuff, like “My salesman recommended this and it went down!!!!” The fact that a complaint has been submitted does not, in itself, mean anything at all.

   Brokers should charge regular broker commissions to buy sell funds ONCE like any other security or ETF not get one percent for as long as you own the fund.

   They will then have an incentive to churn, which is presumably one reason why trailer fees became normal. According to the CSA document:

   In the early 1980s, advisors selling mutual fund securities were typically compensated by a front-end sales charge, then ranging between 8%-9% of the purchase amount, paid by the investor at the time of the purchase transaction. In the late 1980s, mutual fund manufacturers introduced the DSC option at about the same time they introduced trailing commissions. Both developments rapidly changed the dynamics of the fund industry and how the cost of distribution was funded. When a sale occurred under the DSC option, the mutual fund manufacturer, rather than the investor, paid the advisor a sales commission of generally 5% of the purchase amount at the time of the purchase, followed by an ongoing trailing commission of 0.5% per year based on the value of the investment for as long as the investor held the mutual fund. The mutual fund manufacturer funded the cost of both the sales and trailing commissions it paid on DSC sales from the management fees it earned on mutual fund assets. Consequently, the ongoing cost of trailing commissions was embedded in the management fee charged to a mutual fund.

   The DSC option, together with the trailing commission, quickly became the popular alternative to the front-end sales charge option as it offered advisors a similar level of compensation, albeit paid in instalments. It also addressed investors’ growing aversion to the front-end sales charge which had the effect of reducing an investor’s initial investment in the mutual fund.

   However, anybody who feels that the charges should be like ETFs are at perfect liberty to buy ETFs.

   i cannot understand why you do not see the issue re fund governance

   Because trailer fees have nothing to do with fund governance. They are paid by the sponsor from the sponsor’s gross revenue, as discussed above.

10. jiHymas says:

    December 26, 2012 at 3:02 pm

    An Assiduous Reader writes in and says:

    FYI
    Links MER to advice , no?

    [Redacted by JH]

    https://www.ific.ca/content/content.aspx?id=1436

11. jiHymas says:

    December 26, 2012 at 3:03 pm

    Sure – just like every other piece of mass-market advertising attempts to link price to value.

12. jiHymas says:

    December 26, 2012 at 5:31 pm

    An Assiduous Reader writes in and says:

    Does this make it clearer who is paying?

    By selling the fund using Fund Facts there is an implied contract for services.

    The MER is just a flow through of investor money to the dealer

    The Fundco is just the collection agent

    When they don’t want this collection role they sell F class shares

    Phew

    [Redacted by JH]

    http://www.mackenziefinancial.com/eprise/main/MF/DocLib/Public/MF3873.pdf

13. jiHymas says:

    December 26, 2012 at 5:43 pm

    Does this make it clearer who is paying?

    Yes, the Mackenzie Financial document titled Fees and Mutual Fund Investing: T h e Fa c t s makes it quite clear:

    What is a trailer?

    A trailer is compensation that your financial advisor receives from the mutual fund company. The amount of this trailing commission varies, usually from 0.25% to 1% of assets per year, and details can be found in the fund’s prospectus.

    Why are trailers paid?

    The trailing commission compensates your advisor for providing you with ongoing advice about the mutual fund investment. Trailers are not an additional fee; they are already built into the cost of the fund.

    To repeat with emphasis: “A trailer is compensation that your financial advisor receives from the mutual fund company … Trailers are not an additional fee”

    By selling the fund using Fund Facts there is an implied contract for services.

    Such as custody, settlement, and a suitability check – but it’s all quite highly regulated. No need for implied contracts.

    By selling the fund using Fund Facts there is an implied contract for services. The MER is just a flow through of investor money to the dealer The Fundco is just the collection agent

    By this rationale, if I buy a can of beans for $2.49, the embedded $0.01 for rent on the store gives me the right to complain to the landlord about whatever I like – since the store is just a collection agent for the landlord with a flow-through of my money. Well … I can complain to the landlord if I want to, but he doesn’t have to listen to me. Ultimately, if I find the tarmac in the parking lot to be unacceptable and nobody does anything, I walk.

    The Veg-o-Matic Corporation may well hire a demonstrator to show me how I can achieve happiness by owning their product, and they may well hire call-centre staff to deal with my frantic calls, and it’s entirely possible that they will even tell me how much of the cost of their product goes towards paying for these sales-increasing services, but neither the demonstrator nor the call-centre clerk has any fiduciary responsibility to me. If I want a fiduciary to advise me on the purchase of a Veg-o-Matic, I’ll have to pay him myself.

14. jiHymas says:

    December 26, 2012 at 5:47 pm

    An Assiduous Reader writes in and says:

    Because of FF disclosures and prevailing practice the CRA applies HST to trailers

    The point is that they are regarded as a stand alone element of the management fee

    A stand alone element that obligates dealers to provide services that investors have been told they are paying for

    I can appreciate the nuance here but there is no legal debate here- the services are being paid for and must be provided to the investor as a result of his being sold the fund using FF

    The extent , nature and quality of the advice well that’s a horse of a different color

    [Redacted by JH]

    http://taxinterpretations.com/?p=9347

15. jiHymas says:

    December 26, 2012 at 5:54 pm

    The linked document states:

    CRA has ruled that trailer fees received by dealers from the investment manager for an investment fund (presumably, a mutual fund) will be considered to be exempt consideration for having facilitated the sale of shares in the fund only if the dealer does not provide any post-sale servicing of the investor’s account in order to earn the trailer fees, e.g., regularly contacting the client to review the appropriateness of this investment, and reviewing alternatives. Although this may sound like a statement that trailer fees are exempt only if the investment dealer is not doing a good job, in fact this statement may not be problematic as the trailer fees will be earned by the dealer based on the level of continued investment in the fund irrespective of the level of post-sale service provided by the dealer.

    Neal Armstrong. Summary of 15 March 2012 Ruling 132880-2 under ETA s. 123(1) – financial service.

    I tried Googling for Ruling 132880-2, but without success.

    In the first place, I fail to see what relevance the CRA’s tax interpretations have (although I cannot resist pointing out that brokerage fees are not deductible as an investment expense because stock-brokers do not provide investment advice as their primary line of business).

    In the second place, I fail to see what relevance this tax interpretation has on the fiduciary / salesman debate: the law is quite clear that a business relationship is not necessarily a fiduciary relationship.

16. jiHymas says:

    December 27, 2012 at 1:42 am

    An Assiduous Reader writes in and says:

    Re OSC Complaint. There is no link- are you not aware that regulatory complaints arre confidential during the investigation stage ?

    Re IFIC and fundco ads – Subject to Competition Act – could be fined if untrue. Also OSA

    Re However, anybody who feels that the charges should be like ETFs are at perfect liberty to buy ETFs.- not if they want active management [ With a 5$0000 mutfund account a senior pays $500 in trailers each year with a discount broker !] If he has 8 funds , he should be able to buy them for 8x $9.95 or about $80.00 ,one time only

    What Bay Street doesn’t want you to hear [ trailers paid as commissions NOT advice] “A substantial number of do-it-yourself investors are paying for financial advice they are not getting and never will. That’s what can happen when you buy mutual funds from an online broker. While you typically pay nothing to buy and sell your funds, the cost of owning them can be identical to what is paid by investors who have advisers. There’s almost a conspiracy of silence on this matter in the investment industry and it results from the fact that the status quo serves brokers and fund companies quite well. Mutual funds and online brokers don’t seem like an obvious combination, yet funds account for 14 per cent of the $228-billion invested through online brokerage firms, the latest retail brokerage report from Investor Economics shows. Stocks, of course, are the top choice at 66 per cent. Cash and cash equivalents such as Treasury bills account for 12 per cent of assets and bonds and guaranteed investment certificates account for 8 per cent. Wondering where exchange-traded funds fit in? ETFs are an excellent option for DIY investors because they’re so cheap to own and manage, but they account for just 4.3 per cent of online broker assets (Investor Economics lumps them in with stocks).” http://www.globeadvisor.com/servlet/ArticleNews/story/gam/20111203/GISTMAIN1203ATL. Fund investor assets are taking a hit to support fundco sales initiatives.

    Re Trustee obligations- we stand by our original comment. They are diverting fund assets to drive AUM ( a conflict-of-interst ) not provide advice as disclosed in the Prospectus and Fund Facts [ the idea of a class action may not be a bad idea]

17. jiHymas says:

    December 27, 2012 at 2:19 am

    OSC Complaint. There is no link- are you not aware that regulatory complaints arre confidential during the investigation stage ?

    Well, I guess that answers the questions of why there is no OSC link and what the status of the complaint is – but leaves open the question of when the complaint was filed, and why you haven’t published the complaint itself.

    Re However, anybody who feels that the charges should be like ETFs are at perfect liberty to buy ETFs.- not if they want active management [ With a 5$0000 mutfund account a senior pays $500 in trailers each year with a discount broker !] If he has 8 funds , he should be able to buy them for 8x $9.95 or about $80.00 ,one time only

    Why “should” they only have to pay $80? Why must the fundcos and the discount brokerages provide such an option? Very little else in mass-market retail offers a la carte selection of features – when I buy a copy of Playboy, I don’t get a price break for not reading the articles.

    I have been sneered at in another thread for daring to muse on the unintended consequences of changes in the regulation of trailer fees, but I can’t help myself … if discount brokerages don’t get a trailer, will they provide shelf space to the funds? They may well offer only their own funds – which will simply add another few yards to the width of the moat protecting the banks’ oligopoly; and could well mean the demise of smaller funds and, perhaps, a few fundcos as well.

    I will point out that the CSA Discussion Paper discusses the current state of affairs:

    An alternative to this rebate process is to invest in discount online/e-series securities which are currently available on select noload mutual funds offered by a few of the Canadian banks through their online/discount brokerage or e-banking platforms. Most, but not all, of the trailing commission is typically stripped out of the management fee charged on this series, resulting in a reduced MER relative to the original series of that fund distributed through the bank branches. The reduced pricing is intended to reflect the fact that investors in this series of the mutual fund make their own investment decisions, and therefore do not receive nor want recommendations, but are still being serviced by a dealer firm. The average asset-weighted MER of the discount online/e-series currently stands at approximately 0.91%, versus the industry average asset-weighted MER of 1.93%.

    At the end of 2011, there were 66 discount online/e-series available for purchase. However, these assets represented just 0.3% of mutual fund industry assets under management. At this time, the discount online/e-series segment remains dominated by the Canadian bank-owned mutual fund manufacturers. None of the independent ‘load only’ mutual fund manufacturers have similar discounted offerings.

    … and the idea of forcing fundcos to offer F-Class (or E-Series!) units is item (ii) of the request for comments:

    ii. A standard class for DIY investors with no or reduced trailing commission

    Every mutual fund could have a low-cost ‘execution-only’ series or class of securities available for direct purchase by investors. The lower management fees of this series or class would reflect that no or nominal trailing commissions are paid to advisors, in light of the lack of advice sought by DIY investors who purchase and hold securities of this series or class. This low-cost series or class of securities could be made available to investors through a discount brokerage, or alternatively, be distributed directly by the mutual fund manufacturer, in which case the mutual fund manufacturer would need to be registered as a mutual fund dealer.

    Re Trustee obligations- we stand by our original comment

    Fine.

18. jiHymas says:

    December 27, 2012 at 11:59 am

    An Assiduous Reader writes in and says

    Here’s a New Years resolution that could pay big dividends

    Make sure you are getting the advice you are paying for.If not , change advisers.

    ”
    …Mutual fund companies pay the trailer out of the money they charge investors who own their products. Fact is, trailing commissions account for the biggest chunk of fund fees. If an equity fund has a management expense ratio of 2 per cent, then the trailing commission could account for up to half of that amount.The correct interpretation of this information is not that trailers are bad. Rather, it’s that if investors are going to invest in funds through advisers and pay trailers, there’s an onus on them to ensure they’re getting value. An Ottawa-based adviser we’ll call Joe said the trailers he receives pay for investment advice based on the six steps of financial planning, which are goal setting, fact-finding, analysis, recommendations, implementation and monitoring. Clients who want one get a full financial plan included in the services paid for through trailers. “I spend my days working with clients providing investment advice, and I’ve got decades of experience,” said Joe, who is a certified financial planner (CFP)…”

    http://www.theglobeandmail.com/globe-investor/personal-finance/shedding-light-on-a-hidden-mutual-fund-fee/article4382237/

19. December 27, 2012 « PrefBlog says:

    December 27, 2012 at 11:41 pm

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