Mutual Fund Fees - CSA discussion paper and RFC

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AltaRed
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by AltaRed »

And there is a CSA discussion paper out on just that thing I believe. http://www.financialwisdomforum.org/for ... 1&t=115574 Comments due end of February. 52 questions, a lot of them seemingly heavy sledding
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Re: Mutual Fund Fees - CSA discussion paper and RFC

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ghariton wrote:A bit of Googling.
I'm not sure of the intent of these three links. If it is to show that stockbrokers and other intermediaries are, generally speaking, grossly incompetent charlatans, then I couldn't agree more. But in that case I find it difficult to understand the relevance of the point, for two reasons:
i) They are grossly incompetent charlatans who have been selected by investors. They have a business and that business has customers and the customers are happy. I don't see any need for further regulation in such cases.
ii) My second point is best introduced by quoting from the abstract of the first paper:
Bergstresser, Chalmers & Tufano wrote:Furthermore, funds sold through brokers demonstrate more performance sensitivity than funds sold through the direct channel. While the costs of brokers’ services are relatively clear, their benefits are not easily captured by the tangible measures explored in this paper.
So what they are comparing is not Granny Oakum's investment performance with or without a broker. They are comparing Granny Oakum's investment performance with that of a FWF member, who - almost always, I suggest - started investing with a broker, spent time to achieve some familiarity with the investment world, and then started self-managing their portfolio.

Granny Oakum will not spend that time. Granny Oakum is perfectly happy with the way things are - if she wasn't, she wouldn't be a brokerage client, because due to some oversight the regulators still permit her to make that choice. If trailer fees are banned and Granny is asked to start writing a cheque to her broker ... she'll pull her money and put it all into GICs and PPNs from that nice young man at the bank, who doesn't charge anything. If trailer fee disclosure is added to the enormous mass of bumf she gets from her brokerage, then I suggest there's a strong chance she'll pull her money.

The chance that Granny will take the time to become more familiar with investments and join the happy throngs in the direct channel is extremely small. In the first place she's not that interested, in the second place she doesn't have the time and in the third place she doesn't have the required level of confidence to do such a thing. And that third thing, I suggest, is the real value of financial intermediaries: they provide a hand-holding service.

I was struck by the following section of the abstract from the second paper
Chalmers & Reuter wrote:Although we cannot conclude that those investing through a financial advisor would have been better off investing on their own, we can conclude that access to financial advisors is a costly and imperfect substitute for financial literacy.
Quite right, I agree completely. I am sure that you will agree that access to lawyers is a costly and imperfect substitute for legal literacy. However, I for one am not going to enroll in law school, or even start studying contract law using material freely available on the internet. Whenever I have a contract to sign, I'm going to toss it to my lawyer and ask him to explain it to me. And if he makes a good living out of it - more power to him.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by jiHymas »

ghariton wrote:But in this case, I think that adoption of a fiduciary standard is appropriate.
Well, that's my point too. Most of the trailer fee arguments are simply an attempt to sneak in fiduciary standards by the back door; these objectives should be addressed under the fiduciary standard proposals.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by ghariton »

jiHymas wrote:not going to enroll in law school, or even start studying contract law using material freely available on the internet. Whenever I have a contract to sign, I'm going to toss it to my lawyer and ask him to explain it to me. And if he makes a good living out of it - more power to him.
Indeed. And I agree that the same applies to investors who use the services of financial advisers.

But the lawyer has a fiduciary duty. The point of my last few posts was to verify my conclusion that it is necessary to impose a fiduciary standard on everyone who provides, for remuneration, financial advice that involves recommending specific products. I hate that conclusion and I hope that others here can argue me out of it.

I agree that the issue of fiduciary duty should be addressed head on. As AltaRed points out, CSA is doing that too.

I note that the vast majority of lawyers do not need to be under a formal fiduciary duty -- they would behave anyway. But a few would not, and prospective clients have no way of knowing who they are. Hence the sad but necessary imposition of the duty on all lawyers, including additional record keeping and other measures, reporting to the Law Society, etc.

Imposing a fiduciary duty may, in certain cases, increase costs to the point that Granny Oakum no longer buys mutual funds. I have seen no evidence to that effect, but then I have never looked for any. On the other hand, it may prevent Granny Oakum from being sold a product that is totally inappriopriate and potentially disastrous. I have seen examples of that.

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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by jiHymas »

ghariton wrote:Imposing a fiduciary duty may, in certain cases, increase costs to the point that Granny Oakum no longer buys mutual funds.
It isn't so much an increase in costs that I fear - although that will happen - as the fact that Granny has to write a cheque. She won't do this. As with the Canadian public and the GST/HST, she much prefers her costs to be invisible.
ghariton wrote:The point of my last few posts was to verify my conclusion that it is necessary to impose a fiduciary standard on everyone who provides, for remuneration, financial advice that involves recommending specific products.
In the case of mutual funds and trailer fees, it is not the investor who is paying the salesman.

In addition, you have not addressed the question of whether a fiduciary standard will, in fact, increase the quality of advice. I claim that it won't. Fiduciaries are becoming more common in brokerages as many brokers seek to charge clients based on AUM rather than with trailers and commissions. And these guys are exactly the same bozos, clowns and charlatans as they were before ... except that now, Granny doesn't have a basket of funds with an average MER of 1.75%, she has a basket of ETFs with an average MER of 0.50% and an account charge of 2%
Bob Clark, AdvisorOne, citing PriceMetrix, (emphasis added) wrote:Does PriceMetrix really capture the fees charged by the independent advisory channel? I’ll let you be the judge. Here’s the example the PriceMetrix folks used below to show me the FeeCheck tool:

The fee that our model advisor wanted to charge his clients was 1.85%, on an account with an equal mix of equities and bonds. The fee range for all advisors like him was 0.73% on the low end to 2.49% on the high end. The median was 1.53%, and the advisor’s “fee target zone” was from 1.63% to 2.49%, with a recommended fee of 1.85%
With the current system of trailer fees, investors are effectively delegating the negotiation of the price of advice to a larger organization with more experience and clout than they have. I think this is a wise choice for most. For the others ... there is still choice. The regulators haven't gotten around to banning other business models yet.
ghariton wrote:On the other hand, it may prevent Granny Oakum from being sold a product that is totally inappriopriate and potentially disastrous.
Those subject to IIROC regulation - basically all stockbrokers - are already barred from recommending inappropriate investments.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

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I suspect 95% of Canadians don't even read articles such as this and of those that do, most will remain bound by inertia.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by fundamental »

I'd be curious to see when we can buy F-Class funds in discount brokerage.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Shakespeare »

Large number of papers submitted April 12. Many more papers here than on the fiduciary discussion paper.

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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by parvus »

At the risk of sparking more controversy, I would suggest that the fiduciary duty is the more important piece. Retail clients don't generally complain about fees -- though they should know what they pay, and I'm indifferent as to the fee model, and think the dollars and cents should be disclosed to each client -- but they do complain about investments gone awry.

Current KYCs are entirely inadequate. If a financial advisor holds themselves out as a professional, then they ought to have a fiduciary duty to the client saying, "no, don't do this." That's not the way KYCs work. They start with risk tolerances and then work back to suitable asset allocations. Indeed, Zvi Bodie has argued that risk tolerance questionnaires are useless because they point him to much higher equity allocations than he would ever entertain.

That's not good enough, if the advisor is pretending to be more than a salesagent. If there is advice, there is a fiduciary duty, or ought to be. Yet, the IDA once lobbied that stock brokers need know no more about a ciient then what they had in their investment accounts.

Many (but not all) advisors don't get that. They sell the promise of returns, but short the potential risk. Because they're not looking closely enough at savings for retirement and small amounts for speculative capital.

Is misselling widespread? No, I don't think so. Do advisors make honest mistakes? Yes. We all make mistakes.

In any event, if a case goes to court, there will be a presumption of fiduciary responsibility. Might as well codify it now.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DanH »

Thanks for the reminder Shakespeare of the recently passed deadline. I was pleased to see some time ago Invesco Canada's support for improved transparency on fees and performance. I sent a note to their head of legal commending him on that submission. So I was curious to read what he'd submitted in response to this CSA paper. There are certainly many details that I disagree with and I'm still making my way through Invesco's 40-page submission but I'd recommend reading it.

In the context of laying out several options, the paper includes this, which will be of interest to my friend Bylo ;) Hey Bylo, read below and it sounds like it's not financial advisors that may have thwarted the plan to offer F series through Etrade but perhaps the banks.
Invesco Canada wrote: Option 2 – A standard class for DIY investors with no or reduced trailing commission:

We agree with the proposal that mutual funds offer a standard class for DIY investors that would be made available through discount brokers. In fact, Invesco Canada is prepared to immediately offer Series F securities (no embedded compensation) of each of its mutual funds through discount brokers. Invesco Canada is also prepared to create a lower compensation Series D (reduced trail of 0.20% to 0.25% to fund the legitimate operating expenses of discount brokers) through that same channel. Notwithstanding the CSA’s belief in this matter, the bank-owned discount brokers will not agree to this and such broker’s dominate the discount channel. From a business perspective, the independent discount brokers simply do not conduct sufficient business for us to make an offering solely through them.

Our concern is that we would have to subsidize operating expenses in that case since the size of the series would be too small to bear its operating expenses and deliver a significantly lower MER product to investors. We have recently tried to offer a Series D, with a reduced trailing commission, but, again, the bank-owned discount brokers rejected our overtures. It is up to the CSA to address this issue at that broker level and not at the fund company level. This proposal cannot work unless the bank-owned discount brokers are compelled to offer these series through their platforms.

We strongly disagree with the alternative formulation of this option, namely that fund companies be compelled to offer these series directly to investors. First, as an independent investment fund manager, we feel quite strongly as a matter of principle that investors are always best served by seeking financial advice from professionals and by having their money invested with a company solely concerned with investing. If we are forced into distribution, this will detract from our focus on investing to the detriment of our investing clients.

Second, as we have long argued, there are inherent conflicts of interest when manufacturing and distribution are joined. We work hard to avoid conflicts of interest every day and do not wish to be subjected to additional conflicts. Third, engaging in direct distribution would require us to establish an infrastructure to do so, at significant cost (at least several million dollars), and to register with yet another regulator (the MFDA) which also entails significant cost and infrastructure.

Because of these costs, we would be forced to charge distribution costs to investors of these securities and even then there is no guarantee that this could be a profitable enterprise. Is the CSA suggesting that investors who seek advice therefore should subsidize investors who do not? Lastly, as a simple philosophical matter, in a capitalist economy, firms are entitled to select the markets in which they wish to compete. Many mutual fund firms have consciously decided to market their products through financial advisors because we believe investors are generally better off when financial advisors are involved. To force us to compete in a different market is unacceptable in the Canadian economic system.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by jiHymas »

DanH wrote:it sounds like it's not financial advisors that may have thwarted the plan to offer F series through Etrade but perhaps the banks.
What an incredible surprise. I'm astonished.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Shakespeare »

Well, somebody has to pay for those three-piece suits. :wink:
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Bylo Selhi »

DanH wrote:Hey Bylo, read below and it sounds like it's not financial advisors that may have thwarted the plan to offer F series through Etrade but perhaps the banks.
IIRC when E*Trade abruptly terminated their foray into F-class for DIYers reports in the media attributed it to pressure from fundcos in response to pushback by their customerssales channel.

Here's some Chevreau I found in my extensive archive ;) [my red]
Speak up for lower mutual fund fees
Support those who offer F class funds through discounters

Jonathan Chevreau
Financial Post

Thursday, April 22, 2004
The revolution over making low-fee F class mutual funds available through discount brokers may have been crushed temporarily, but fund fees are definitely on the industry's radar screen.

It used to be the industry simply ignored the issue of high Management Expense Ratios (MERs). So it's encouraging that Mackenzie Financial Corp. has just released a brochure entitled Fees and Mutual Fund Investing: The Facts.

Mackenzie president David Feather agrees the brochure is a response to rising awareness of the MER/"costs matter" issue by media and the public. You can get the brochure from your financial advisor or by calling 1-800-387-0614.

Ironically, it comes on the heels of what might have been -- and may yet be -- a new era of lower-priced actively managed mutual funds. As reported in Advisor Post and elsewhere, E*Trade Canada's bold attempt to make F class funds available to do-it-yourself (DIY) investors was squelched when its first two willing suppliers pulled out.

AIM Trimark Investments says it never signed off on E*Trade's announcement and that while discussions had reached an advanced stage, it ultimately decided its business model is based on the full-advice model. Spokesman Dwayne Dweger denies that certain "big producer" advisors threatened to put their clients into rival funds if AIM sold F class funds through E *Trade.

Elliott & Page says it belatedly realized its prospectuses prohibited selling F class funds through any channel apart from fee-based advisors.


Mackenzie's brochure is useful for explaining the background to this and the relation fees have to advice. In fact, the brochure is subtitled Insights into the Value of Advice. It says the average MER for Canadian equity funds is 2.44%, for global equity funds is 2.51%, for bond funds 1.45% and money market funds 0.71%.

A pie chart breaks down the MER of a 2.51% global equity fund. It shows how much of a $10,000 investment in an equity fund Mackenzie receives each year. Four fifths of it -- $200 or 2% -- is the management fee. Another 14% [$35] goes to operating expenses and 6% [$16] to the GST. Only $102 or 40.8% of the MER accounts for Mackenzie's investment management fee. The other 39.2%, or $98, it calls the "dealer component" -- front- or rear-load commissions, annual trailer or service fees and co-op marketing expenses.

This breakdown describes the normal way mutual funds are sold through independent advisors. Mackenzie argues its 1% slice is reasonable for the professional active management and security selection this buys. I'd agree.

Like AIM, Mackenzie also argues advisors selling its funds are worth their 1% slice too because they help investors stay the course, avoid panicking in market downturns, etc. The brochure spends pages on this.

How do F [for fee-based] class funds come into play here? These are funds with dealer compensation stripped out. If Mackenzie or AIM sold direct to consumers -- like no-load firms Altamira or Phillips Hager & North -- you might expect to buy their funds for 1% plus GST and operating expenses: i.e. 1.51% all in.

However, the industry takes the position F class funds can only be sold through advisors compensated by charging their own asset-based fee.

Ignored are DIY investors who do their own research, make their own investment decisions and resent paying for advice their neither value nor want. They'd like to buy F class funds from discount brokers by paying a sales charge. That's what E* Trade proposed to do: it would charge $26.99 to buy an F class fund, the same as it charges for buying individual stocks. This "self-directed" segment of the market accounts for 40% of the market, says E*Trade Canada president Colleen Moorehead.

Moorehead says two fund majors turned the idea down flat but there is still considerable interest even since AIM and E&P bailed. For now, the program is "on hold" but two other top-tier firms and two mid-tier manufacturers have since come forward. It will take time because a change in fund prospectuses may be needed to come on board.

But E*Trade could mimic ASLDirect.com and rebate trailers on regular A class funds. E*Trade already does that in the United States.

ASL sells F class funds as well as regular A class funds with trailers rebated. Either way, MERs are generally a full 1% lower than usual. ASL is considered a fee-based advisor, since it charges a $29.95/month subscription fee and offers advice.

Clearly there exist good advisors who are worth their trailers, and poor advisors who aren't. The many excellent advisors who know they add value to clients needn't feel threatened by discounters offering F class funds. Clients who value such advisors will continue to do business with them because their worth has been proven.

It's lousy advisors who know the "value" they provide is nothing like 1% of client assets who feel threatened by F class funds -- and discount brokers who make no pretense of providing advice but still collect trailer fees meant to compensate the "real McCoy" advisors.

Let the market decide. Investors should support ASL, E*Trade and the first fund companies to officially offer F class funds through discounters. And the banks' discount brokers should follow E*Trade's lead.
Do you see any mention of big bad banks in there?
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DanH »

I realize it's no shock that banks wouldn't like the idea but it's certainly a different theory than angry financial advisors feeling threatened that their clients would now be able to buy cheaper versions of the same products they sell to clients. This implies banks probably exerted pressure on the fund companies involved at the time - Invesco (i.e. Trimark) and Manulife (i.e. Elliott & Page). And this idea coming directly from one of the companies. It's really bank brokerage firms not wanting to give up juicy trailing commissions rather than charging a flat trading commission.

Yes yes, I know that taking trailers from discounters has the potential to push costs up if F series are opened up through discounters and brokers have to charge their own fees on these trades. But this is the first time since 2004 that a fund company has come out and said they're ready to do this today. In any event, this particular submission is interesting and not your typical fund co fluff. Invesco's head counsel is a straight shooter; very practical.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Bylo Selhi »

And if you don't like Chevreau, here's Carrick: Loss of AIM mars E*Trade's cheaper investing bid
Blame this setback on the folks at AIM and, by extension, any other fund companies that won't make their F-class funds available to self-directed investors. By taking this position, they've made it clear that what matters most to them is keeping their sales force -- read: financial advisers -- sleek, fat and happy.

AIM obviously cares about investors, too. In fact, the company offers one of the better combinations of reasonable costs and solid performance. It's just that the advisers are the company's true clients, not investors. Advisers are responsible for the vast majority of fund sales in Canada...

The official line from the company is that its F-class funds were created strictly for use in fee-based accounts. More likely, AIM is concerned that making F-class funds widely available would undermine advisers.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DanH »

Bylo Selhi wrote: Do you see any mention of big bad banks in [Chevreau's story]?
No. Do you think official reasons put in press releases and media articles are the real reasons?

Added: The bank theory makes total sense. The banks control the discount broker business and they also control full service distribution. If they wanted to, they could use their heft on the full service side to influence a course of action. They could also threaten to steer clients away from F series funds by levying their own fees/loads that would be far higher than other trailer fee paying funds or competing products - or do what RBCDI did recently and stop carrying the funds altogether. Since distribution is king, fund cos. don't want to face that kind of backlash.

I'm reading between the lines but that theory is more believable to me than what the Post and Globe printed on the subject.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Bylo Selhi »

So call Chevreau and/or Carrick, bring up your interest in the CSA discussions, and ask them if they remember who really killed E*Trade's F-class initiative, i.e. what they may have learned from insiders that was off the record ;)
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DanH »

I'm not that interested to spend my time (and theirs) talking about this old news. But I don't mind spending a few keystrokes giving you a virtual poke on the topic ;)

But again, main motivation for posting that exerpt and linking that submission is that I found it to be an interesting and honest reply from a big fund co.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Bylo Selhi »

DanH wrote:I'm not that interested to spend my time (and theirs) talking about this old news. But I don't mind spending a few keystrokes giving you a virtual poke on the topic ;)
The two remaining actively-managed funds I have are relatively small positions in what are essentially F-class in house accounts. So I no longer have any skin in this game. But I too like "giving you a virtual poke on the topic." :lol:
But again, main motivation for posting that exerpt and linking that submission is that I found it to be an interesting and honest reply from a big fund co.
Agreed. Thank you for posting it (and Invesco for submitting it.)
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Peculiar_Investor »

Tip of the hat to Tom Bradley of Steadyhand, OSC Announces Agenda for Roundtable Discussion of CSA Discussion Paper and Request for Comment 81-407 Mutual Fund Fees to take place Friday, June 7, 2013 9:00 a.m. to 1:00 p.m. on the 22nd floor of the OSC’s offices, located at 20 Queen Street West, Toronto, Ontario.

The agenda is posted at the above link and the roundtable is open to the public per
OSC wrote:Any interested parties wishing to attend the roundtable are asked to send an email with full contact details to: investmentfunds@osc.gov.on.ca to confirm their attendance. Space is limited. It is expected that a transcript will be posted to the OSC website following completion of the roundtable.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by AltaRed »

It would sure be great to have a DIY investor from the GTA there from our esteemed group.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by optionable68 »

AltaRed wrote:It would sure be great to have a DIY investor from the GTA there from our esteemed group.
Whats the point? I suspect less than 5% of the DIYers on this forum would buy mutual funds with or without embedded advisor compensation.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by AltaRed »

Perhaps, but for the broader interest of the retail investor...which I think is part of the FWF mandate. A DIY type is not necessarily only a stock/ETF investor. For example, I have held an F class Bissett mutual fund for well over a decade. It tends to beat its benchmark index almost all the time.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by DenisD »

FWFers will buy mutual funds if the fees are low enough. E.g. TD e-funds.
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Re: Mutual Fund Fees - CSA discussion paper and RFC

Post by Shakespeare »

Or if there is no ETF. eg PH&N High-Yield Bond.
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