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

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