New fee dis­clo­sure re­ports tell half the story

Mu­tual fund in­vestors not be­ing told what por­tion of man­age­ment fees is re­tained by firm to cover costs

The Hamilton Spectator - - BUSINESS - DAVID HODGES

Thanks to re­cently phased-in rules about what fi­nan­cial in­sti­tu­tions must dis­close to clients, Cana­di­ans are now start­ing to re­ceive an­nual in­vest­ment re­ports show­ing in dol­lar terms the cost of the fi­nan­cial ad­vice they re­ceive.

But fi­nan­cial ex­perts say th­ese new doc­u­ments only pro­vide the typ­i­cal in­vestor about half the pic­ture when it comes to what’s be­ing paid in over­all fees and charges on com­mis­sion-based mu­tual funds.

What’s still not avail­able on CRM2 an­nual re­port state­ments is the por­tion of the man­age­ment fees re­tained by the fund com­pany to cover its own op­er­at­ing costs.

“So this new re­port may still not cover all the costs and fees you pay in to­tal,” says Preet Banerjee, a Toronto-based per­sonal fi­nance com­men­ta­tor.

That’s be­cause the new dis­clo­sure rules — known as Client Re­la­tion­ship Model-Phase 2, or CRM2 — only re­quire in­vest­ment firms to re­port what clients are be­ing charged for ad­vice, ad­min­is­tra­tive costs, trad­ing com­mis­sions and mu­tual fund trail­ers, says Dan Hal­lett, vice-pres­i­dent of HighView Fi­nan­cial Group in Wind­sor.

Us­ing the ex­am­ple of an in­vestor with a $100,000 port­fo­lio made up of com­mis­sion-based mu­tual funds and a two per cent man­age­ment ex­pense ra­tio (MER), Hal­lett say clients with such a port­fo­lio would likely see about $1,000 in fees and charges on their an­nual CRM2 re­port state­ment.

But Hal­lett says the to­tal amount of fees and charges would likely be closer to $2,000 af­ter ac­count­ing for the por­tion of the MER that goes to the fund com­pany. “So in that par­tic­u­lar sce­nario, you could take that num­ber and roughly dou­ble it,” Hal­lett says, adding that fi­nan­cial in­sti­tu­tions should show those ad­di­tional costs if you ask for them.

Banerjee says Cana­di­ans in­vest­ing in mu­tual funds through a bank or full-ser­vice ad­viser are in for the big­gest sur­prise, even though the new CRM2 re­port rules ap­ply to all se­cu­ri­ties in­clud­ing ex­change-traded funds, or ETFs.

“No doubt, there will be some sticker shock,” he says, par­tic­u­larly when it comes to the pre­vi­ously undis­closed cost of mu­tual fund trailer fees.

Trailer fees pay ad­vis­ers for the on­go­ing ser­vice they pro­vide to their clients based on com­mis­sions that aver­age about 0.75 per cent an­nu­ally of a mu­tual fund’s aver­age net as­sets for that year, and is em­bed­ded i n the fund’s MER. This has led some mu­tual fund in­vestors to mis­tak­enly be­lieve that the ser­vices pro­vided by their ad­vis­ers are free.

While not all mu­tual funds in- clude trailer fees, the ones sold through banks and full-ser­vice ad­vis­ers of­ten do.

Mu­tual funds typ­i­cally make up a siz­able por­tion of in­vest­ment port­fo­lios. Ac­cord­ing to the In­vest­ment Funds In­sti­tute of Canada, there was $1.34 tril­lion in mu­tual funds as of last Dec. 31 — about 31 per cent of Cana­di­ans’ fi­nan­cial wealth.

Banerjee says the fee dis­clo­sure en­hance­ments in the new CRM2 re­ports — while far from com­pre­hen­sive — are at least a step in the right di­rec­tion af­ter decades of in­dus­try re­sis­tance.

“A lot of the changes that we’ve seen in the last cou­ple of years stem back from rec­om­men­da­tions made in 1995,” he says. “Change hap­pens painfully slow in this in­dus­try, un­for­tu­nately.”

‘No doubt, there will be some sticker shock’ (when it comes to the pre­vi­ously undis­closed amount of trailer fees). PREET BANERJEE, PER­SONAL FI­NANCE COM­MEN­TA­TOR

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