Mutual Fund Fees - CSA discussion paper and RFC

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Mutual Fund Fees - CSA discussion paper and RFC

Post by Peculiar_Investor »

Tip of the hat to Regulator weighs cap on mutual fund fees, other reforms - The Globe and Mail. The Canadian Securities Administrators (CSA) had released CANADIAN SECURITIES ADMINISTRATORS DISCUSSION PAPER AND REQUEST FOR COMMENT 81-407 MUTUAL FUND FEES (all-Caps their's, not mine).

The comment period closes on April 12, 2013.

I've just started reading, but found something for Bylo, among the possible changes they list,
CSA discussion paper wrote:ii. 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.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Bylo Selhi »

Peculiar_Investor wrote:I've just started reading, but found something for Bylo, among the possible changes they list...
Thanks. That's good news if it ever happens. I suspect the fundcos, dealers and brokers will get their lobbyists to work on thwarting this ASAP.
CSA wrote: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.
AFAIK most if not all fundcos are already registered as fund dealers in order to offer so-called "house" accounts to insiders, employees, family/friends, etc. on a no-load, no-trailer basis. Hopefully DanH will correct me if my understanding is wrong.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by optionable68 »

I like the idea, but it is likely to face considerable advisor pushback.

I believe Invesco Trimark briefly initiated plans to sell F-class funds through discount brokerages approximately 10 years ago in the interest of DIY clients. Shortly after that announcement, advisors fumed and essentially forced Invesco to retract the offer or risk losing their endorsement of their investment products. It was advisors' contention that their clients/prospects would simply come in for a client meeting, get a free consultation including a portfolio proposal from the advisor at no cost, and then simply log into their discount brokerage account and transact the recommended products at fee-based (i.e. no trailer) pricing.

If F-class funds ultimately become a reality for a discount brokerage client, I am confident that the brokerage houses will initiate transaction fees to buy and/or sell, otherwise why bother including profitless products on a platform ?
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Taggart »

It doesn't change my lousy opinion of the active mutual fund industry and after over thirty years of witnessing it, they can do what they like. It doesn't change my mind. I won't be investing in them.

Outside of a few ETF's, and aside from TD e-Series funds, I haven't seen anything so cheap and user friendly for the small investor.
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CSA Discussion Paper on Mutual Fund Fees

Post by AltaRed »

The Canadian Securities Administrators issued a discussion paper on Dec 13, 2013 regarding the mutual fund fee structure in Canada:
The Canadian Securities Administrators (CSA or we) are examining the mutual fund fee structure in Canada in order to see whether there are investor protection or fairness issues, and to determine whether any regulatory responses are needed to address issues we find. This paper is intended to be a platform to begin a discussion on the current mutual fund fee structure in Canada.
This discussion paper is the first step in the CSA‟s public consultations about this project. It:
 provides an overview of the roles of the market participants in the mutual fund industry (mutual fund manufacturers and advisors who distribute the funds)
 provides an overview of the current mutual fund fee structure
 identifies some investor protection and fairness issues we think arise from the current fee structure
 provides an overview of global regulatory reforms
 describes some regulatory options the CSA could potentially consider, either alone or in combination.
Some of the options would impact mutual funds or mutual fund manufacturers directly, and others would impact those who sell the product
Comments are due April 12, 2013. The paper is located on at least some provincial CSA sites. I found it here Caution to those with slow connections - just over 1 MB in size.

I would hope our Financial professionals such as Norbert and Don Hallett will be commenting on this paper. I think it would behoove some of us laymen to also comment on this paper since we know the mutual fund companies and investment dealers will be pushing back in spades. IOW, if we want change, stand up and be counted. It seems people like Larry Berman and Tom Bradley will be saying something. I will likely submit at least a few comments, not necessarily just on transparency, but in particular, our (and our champion Bylo's) pet peeve about DIY investors not being able to purchase F series mutual funds from discount brokers (not that we actually might do so, but on principle we should be able to do so).

For those that are not inclined to comment, reading it, especially viewing the various figures and charts, as well as scanning Annex 1 is worth some time.
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Re: CSA Discussion Paper on Mutual Fund Fees

Post by Taggart »

Tom Bradley has an article about the CSA paper on globeinvestor.

Mystified over fund fees? Big changes are coming, and the sooner the better
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Re: CSA Discussion Paper on Mutual Fund Fees

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Re: CSA Discussion Paper on Mutual Fund Fees

Post by AltaRed »

Oooops, don't know how I missed that. I googled AND checked sub-forums... just not the one on actual Stocks, bonds, etc. A merge of these 2 threads is in order... but think it should be in this sub-forum.

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Re: CSA Discussion Paper on Mutual Fund Fees

Post by scomac »

Taggart wrote:Tom Bradley has an article about the CSA paper on globeinvestor.

Mystified over fund fees? Big changes are coming, and the sooner the better
Sounds like a bit of finger pointing to me. When I hear of advisors like John de Gooey charging 2.5% of AUM for his services to build an ETF portfolio, my first reaction is that it is a bit of a shell game. Total costs aren't coming down despite moving to lower cost investment products. Last time I shopped full service brokerages, the standard fee was 2% of AUM for an equity portfolio assuming a $500K minimum. It really doesn't matter what you use, the only way that I'm aware of getting low cost financial management is via DIY.

Are the advisors getting rich? I would submit based on the cost of servicing accounts from a compliance and reporting perspective, unless you have amassed a huge high net worth clientele, that's not likely the case. Even in that scenario, the competition for clients will be strongest as there are more viable alternatives. Whether or not those clients are typically more financial savvy or not, there is an expectation for service, so I doubt those sorts of advisors get off scot free.

Typically more regulation leads to greater costs to deliver service, so while intentions might be good, I'm left wondering if the end result will be a wash or worse.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by scomac »

Here's an eye opener; the discussion should be about the cost of advice/service rather than the fees attached to the products. I took about two minutes to run a quick screen of Canadian Equity Focused mutual funds and measured performance at the hurdle rate of XIC less the cost of advice using the de Gooey example to arrive at an apples to apples comparison. If you're paying 2.5% of AUM for advice, the performance of XIC (net of all costs) is -2.6% over the past 5 years. 340 of 470 Canadian Equity Focused funds met or surpassed that benchmark! :shock:

Once the service model moves more fully to fee based, there's not a whole lot CSA can do beyond requiring compliance. When you know up front what you are paying, that's full disclosure. It becomes a free market and service providers can charge whatever the market will bare as evidenced by my example upthread.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DanH »

Bylo, it's true that most fund co's are also dealers purely for institutional or internal purposes. However, while I agree with the concept of having low fee series units of all funds available at discount brokers I strongly disagree with actually following through with this.

Right now, if you restrict yourself to cheap no load funds, it's very difficult to make a really poor choice. In fact, almost all of them range from pretty good to excellent IMO. I'm talking about Beutel Goodman, Leith Wheeler, Mawer, Steadyhand, PH&N. Not every fund in this group is fantastic and I wouldn't recommend every one but it's really tough to go way wrong with any of these firms' funds.

If regulators unleash the entire fund universe in a series of funds equivalent to the F-series, investors will initially be thrilled but it will be much tougher to find good funds - i.e. much much easier to make stupid choices - thereby deteriorating the DIY investor experience and return potential.

Read The Paradox of Choice (thanks to NormR for giving me this excellent book years ago) for an extensive explanation of why this is the case. In short, more choice = more difficulty in making decisions = less satisfaction [and I would argue = lower investment returns over time].

scomac, Mr. DeGoey's fee IIRC is in the range of 1.4% for the first $250k or $500k and scaling down significantly to 0.75% or something like that thereafter. So a high fee for that first tier but quite reasonable afterwards. But fair point - one I've made lots of times - that even at 1.4% the all in after tax cost brings you right up to the load mutual fund MER levels - thereby leaving no fee advantage for the end client.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by AltaRed »

I see the CSA paper as two fold. Firstly, full transparency on disclosure of who gets paid what. Secondly, fees in Canada are too high at least in some cases relative to other jurisdictions, and perhaps transparency and disclosure will help to drive down those fees. So my view is that rather than go on a witch hunt about the amount of fees, focus in on transparency and disclosure, and inequities, and the rest will take care of itself eventually.

Example 1: Lack of F series funds to DIY investors at discount brokers. There should be no trailers paid - period. That does not mean the fund management companies do not collect their management fee but it would be at least disclosed on the Fund Facts sheet and competitiveness would happen at that level.
Example 2: If an investment advisor had to disclose his/her compensation on a mutual fund recommendation, the client would at least know he is paying more for a recommendation on a Fidelity fund rather than am equivalent Mawer fund (and how much that is costing him/her each year), and be able to ask the question why. How many full service clients have Mawer funds in their portfolio instead of Franklin Templeton, Fidelity, CI, etc? How could an IG salesman look his/her client in the eye and justify his/her return? This latter example to me is the primary focus of the CSA paper.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Taggart »

AltaRed wrote: How could an IG salesman look his/her client in the eye and justify his/her return?
How can an IG salesman look his/her client in the eye when their best funds in four categories (Canadian bonds, Canadian Equity, U.S. Equity and International Equity) haven't even beaten the performance of any of the "live" index funds in TD e-series over the past ten years?
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by scomac »

AltaRed,

I agree wholeheartedly on the availability of F class funds at the discount brokerage level. This is perhaps the biggest rip-off that is occurring as the trailer that is being collected is to support client service when in fact there is no advice involved. Having said that, DanH makes a good point that more choice may not necessarily be better.

On the second point, disclosure is already happening both in written form and in many cases verbally as well. The issue of cheaper choices is entirely dependant upon the client knowing that these exist. It sounds as though you want it mandated that all advisors must offer such choices so that those who are unaware can be made aware of these without expending any effort on their own. I guess it depends upon what sort of advice you are purchasing from an advisor. While it maybe for the planning aspect alone, I'm quite confident that the vast majority want the advisor to recommend the investments as well.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by scomac »

Taggart wrote:
AltaRed wrote: How could an IG salesman look his/her client in the eye and justify his/her return?
How can an IG salesman look his/her client in the eye when their best funds in four categories (Canadian bonds, Canadian Equity, U.S. Equity and International Equity) haven't even beaten the performance of any of the "live" index funds in TD e-series over the past ten years?
How often do you think that they are called on this? Even if they are, the distinction is pretty clear; eFunds are not part of a full service package that includes advice. Will the client buy that? I don't know, but chances are if they are at the point that they are asking those sorts of questions, they are most likely contemplating leaving.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

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What I am (and the CSA paper is) advocating is the advisor has to disclose the major pieces of MER costs to the client, i.e. specifically how he is being compensated and how much. It is still up to the client to be savvy enough to know the trailer might be less on a Mawer fund than a Fidelity fund and why the Fidelity fund is being recommended over the Mawer fund. That information is buried in the prospectus, but not the Fund Facts sheet today (only total MER, not the breakdown of Management fee and trailer fee and other costs). CSA wants to change that to make the disclosure mandatory and transparent.

I understand what Dan is saying too, but I don't see how that is detrimental. The availability of F class to discount brokerage clients should be the default. If that was the case, the discount broker will need some compensation for the administrative work, e.g. a commission same as stocks to buy/sell, perhaps even a bit more, e.g. $20 instead of $10, but that is a small price to pay to scrub the trailer fees out of the DIY system.

As an aside, it is my view that RBC Direct Investing has gone part way there by offering D series RBC family funds to their own clients, provided they also meet the threshold initial buy (CSA alludes to this and TD efunds in their paper without stating names). I will speculate they did that to attract clients with a lower MER fund while still providing profit internally to themselves AND keeping the mutual fund industry happy by not offering F class. I would not be surprised if there was a lot of discussion between RBC DI and the major mutual fund companies to find out what RBC DI could get away with - without the mutual fund companies conspiring to pull the availability of their funds away from RBC DI. FWIW, I asked RBC DI one time (some family accounts are there) why they could not at least offer F class RBC family funds to their own clients instead of D class and did not get a satisfactory answer. I love the speculation of a conspiracy :lol:
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Bylo Selhi »

AltaRed wrote:I understand what Dan is saying too, but I don't see how that is detrimental. The availability of F class to discount brokerage clients should be the default. If that was the case, the discount broker will need some compensation for the administrative work, e.g. a commission same as stocks to buy/sell, perhaps even a bit more, e.g. $20 instead of $10, but that is a small price to pay to scrub the trailer fees out of the DIY system.
I think Dan is giving the rationalization used by DSC fund floggers, i.e. the higher fees are there for your own good to discourage you from making bad decisions ;)

I've said it many times before. I don't believe discount brokers should transact F-class funds for free. I have no problem with a reasonable fixed fee like the $10/$30 they charge to transact stocks. I have huge problems with the likes of TDW who charge synthetic (translation: something they created to satisfy their own greed) front-end loads of up to 2.5% to buy units of mutual funds like PH&N that pay them no trailers. And of course I have to ask again what justification TDW has to collect those trailers when they're barred by securities regulators from offering the advice those trailers are intended to pay for.
FWIW, I asked RBC DI one time (some family accounts are there) why they could not at least offer F class RBC family funds to their own clients instead of D class and did not get a satisfactory answer. I love the speculation of a conspiracy :lol:
When PH&N was bought by RBC they introduced a new class of their funds with lower-MERs, presumably to appeal to advisors who would tack their advisory fee on top of that. We still have a position in PH&N Dividend. Naturally I asked PH&N to switch it to the new class since we were neither asking for nor getting advice from them for something like two decades. I don't recall their excuse for not doing it but it was very weak, atypical for PH&N but just what one might expect from RBC.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by AltaRed »

FWIW, some time after RBC DI came out with D series funds, we transferred my mother's investment account from Royal Bank (RBC Asset Management I reckon) to RBC DI and switched to D series funds from B (or A?) series as soon as they landed in RBC DI.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Taggart »

DanH wrote:
Right now, if you restrict yourself to cheap no load funds, it's very difficult to make a really poor choice. In fact, almost all of them range from pretty good to excellent IMO. I'm talking about Beutel Goodman, Leith Wheeler, Mawer, Steadyhand, PH&N. Not every fund in this group is fantastic and I wouldn't recommend every one but it's really tough to go way wrong with any of these firms' funds.
All the above funds you've quoted above have one thing in common Dan. They all have high minimums (ranging from $5000 to $25000 per fund). That's all right for some people making good salaries, but not everybody can afford that. With TD Waterhouse an investor can start a TD e-Series investment with $100. The account gets large enough, the investor can eventually switch to ETF's. Things are changing over time and the old ways are fast disappearing in the finance industry.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DanH »

Bylo Selhi wrote:I think Dan is giving the rationalization used by DSC fund floggers, i.e. the higher fees are there for your own good to discourage you from making bad decisions ;)
Not at all. I'm not talking about DSC at all. It's about letting fund co's decide where they want to distribute their funds. It's their choice. But as I'll post in the next day or so, I don't like discounters getting full service trailers and either directing its clients into fully loaded funds, restricting access only to those paying a sufficiently high trailer or levying their own hefty % charges for a simple transaction.

Taggart, I figured $5k was low enough. But for anybody needing a lower min can simply do as you say or walk into their branch for regular index funds or cheap balanced funds. Or something like the CI Signature High Income, which I've often recommended for beginning investors - i.e. a relatively cheap balanced fund. Then again, in the early days of accumulation, an investor's rate of savings dwarfs her rate of return in importance. It's only when bigger dollars are involved that the rate of return starts to get much more important.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

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DanH wrote:

Taggart, I figured $5k was low enough. But for anybody needing a lower min can simply do as you say or walk into their branch for regular index funds or cheap balanced funds. Or something like the CI Signature High Income, which I've often recommended for beginning investors - i.e. a relatively cheap balanced fund. Then again, in the early days of accumulation, an investor's rate of savings dwarfs her rate of return in importance. It's only when bigger dollars are involved that the rate of return starts to get much more important.
Thanks for responding Dan. At least we're on the same wave length when it comes to the smaller investor. The problem is to reach out to the ordinary worker being paid a small salary or the small business owner, and say yes, you can invest for yourself. Since I'm fully retired, I would do it as a volunteer, but I've never figured out a way to do so yet. Perhaps one day, before it's too late, I'll come up with a bright idea.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by parvus »

Bylo Selhi wrote:When PH&N was bought by RBC they introduced a new class of their funds with lower-MERs, presumably to appeal to advisors who would tack their advisory fee on top of that.
I believe PH&N introduced the advisor class before they were bought by RBC. I may still have the marketing materials. I do know the appeal to advisors occurred before the RBC buyout.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Shakespeare »

Any realistic discussion of fee structure has to recognize that appropriate fees will still have to be paid. As Bylo pointed out, that may mean buy/sell fees.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by jiHymas »

Shakespeare wrote:Any realistic discussion of fee structure has to recognize that appropriate fees will still have to be paid. As Bylo pointed out, that may mean buy/sell fees.
And the appropriate regulators will determine the appropriate fees and be paid an appropriate salary for doing so! Yay!

Another nation of rugged capitalists has already taken the step of determining how businesses may offer their services, with forseeable results. I am surprised that so many on this thread want to eliminate access to financial advice for those who need it most. However, I suppose Stage II of the plan is mandatory financial research by everyone, using freely available internet material. It shouldn't take more than three- or four-thousand hours to complete the required course that will enable separation of the good advice from the bad, and afterwards a mere 100 hours per year or so of mandatory continuing education. All those little old ladies will be grateful, yes, grateful for this compulsory process, which will save a few hundred dollars per year on fees. A few hundred dollars per year doesn't sound like much, but when compounded annually over fifty years at a rate of 8% it comes to ... um ... gazillions! Gazillions of dollars, I say!

Study by Deloitte: Bridging the advice gap: Delivering investment products in a post-RDR world

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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by AltaRed »

I don't think anyone is specifically saying regulator should determine the fees, nor that fees should not be paid for advice. But if the investor is readily informed about what fees are getting paid and to whom, investors could make better choices. The investor might then challenge his/her advisor why the recommendation is for a fund with a 1.5% trailer fee rather than an equivalent with a 0.5% trailer fee. Why do you think more retail investors own Fidelity or Templeon funds than, say, Mawer funds?

This discussion is getting off on a tangent about the primary purpose of the CSA paper. It is about disclosure and transparency of fees and who gets what portion. Those who wish to pay for advice can still do so. Those that do not can go elsewhere. And per Shakes, fees will have to be paid for services rendered, even if it is a buy/sell commission at a discount broker for an F series fund. Just make everyone compete on a level playing field.
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