Fuzzy on fees
An Ottawa Citizen editorial: Canadians regularly get worked up about nickel-and-dime fees on bank accounts, but tend to complain less about much bigger fees on their investments.
Management expenses on mutual funds frequently take more than two percentage points off the top of an investor’s holdings each year, regardless of how the market performs. But many investors would have a hard time adding up what they pay in fees because they are nearly invisible: The fees are taken from the assets in the funds, so there’s no line on a statement that says you are paying $1,000 a year to own a fund with $50,000 in it.
Canadians paid more than $13 billion last year to mutual fund companies and to financial advisers who receive fees from them.
Now there’s good news from the Canadian Securities Administrators, a group representing all the provincial securities commissions. It is suggesting new rules for fees in the mutual fund industry to make fees more visible. The problem is that even though prospectuses cover fees in the fine print, most investors “mistakenly believe there is no cost to purchasing or owning a mutual fund,” and financial advisers frequently don’t discuss this, the regulators say. “Research also shows that investors have little to no idea of how advisers can get paid.”
Advisers are not legally required to tell about this part of the business. This, the regulators say, causes investors to make decisions based on inadequate information. They say attaching trailer fees to funds “may give rise to actual or perceived conflicts of interest at both the mutual fund manufacturer and adviser levels.”
Among other things, regulators suggest “unbundling” trailer fees and charging them as a separate, visible fee; banning them where an adviser isn’t actually doing anything for the client; or even forcing advisers to charge clients directly and receive nothing from the fund companies. This last measure could be a way to avoid conflict of interest.
At the very least, measures demanding full disclosure of who pays how much and to whom are long overdue. Information is never a bad thing for investors, and today we have too little. It’s up to investors to have the next word by commenting on this paper.