• Warren Laing

So you’ve found a mutual fund that will manage your money for free!

Updated: Apr 9


Some plan members tell us that their advisor has found a mutual fund that doesn’t charge any fees! What should have been said is that the fees charged are deducted monthly from the fund by the mutual fund company and do not show up in the investor's statement. We all know that very few things in this life are for free, and mutual funds are not one of them.

So let’s look at the fee practices prevalent in both the mutual fund (“Fundcos”) and life insurance (“lifecos”) industries and try and decipher what investors are actually being charged. Unfortunately, this is a complex subject and there is no simple way to explain how it works.

Let’s start with the fundcos. Originally, they charged the investor three fees, a sales commission payable to the advisor when the sale was made, an annual investment management fee (“IMF”) to cover the fundco’s cost of managing the investments and an administrative fee to cover the day to day operating expenses, such as record keeping, fund valuation costs, audit and legal fees and statement production costs. The IMF and administration fees are deducted from the value of the fund by the fundco and are often not apparent to the investor. Initially, when the advisor sold $1,000 worth of units of a mutual fund the investor gave the advisor a cheque for $1,000, the advisor kept $50 and forwarded the remaining $950 to the fund company to be invested in the investor’s account. Then as investor resistance to sales commissions increased the fundcos came up with the deferred sales charge (“DSC”) concept.

Mutual funds sold on a DSC basis have no upfront sales commission, but instead the fundco often charges a higher IMF and imposes a penalty if the investor sells the fund within the first 5 to 7 years. The fundcos still pay the advisor a commission but finance it out of a combination of the higher IMFs and the penalties imposed on investors for early redemptions during the first 5 to 7 years. The important point here is that the investor is often unaware of the higher IMF and the penalties on early redemption.

By financing the sales commission through the IMF and redemption charges, and deducting the IMF internally from the assets of the fund some investors believe that they are not paying a fee to the fundco. Obviously this is not the case, in fact in many instances they are paying a higher fee, but are unaware of it.

Eventually, investors grew to understand what DSC meant and their concerns resonated with the regulators. The reaction of the Securities Commission was to introduce Client Relationship Model (“CRM”) and (“CRM2”) which set out how the industry must report investment performance and disclose the fees being charged. Unfortunately, the regulations only show the total compensation received by the advisor and not the total amount paid by the investor. However at the end of this Blog is a list of questions you might want to ask to obtain a clear picture of how much they are charging you.

Turning to the insurance industry, again pricing is driven by the need to pay commissions to the advisors delivering group retirement plans to the life insurance companies. Here the advisor generally receives a 1% commission on all assets transferred to the lifeco including; the initial plan transfer, any monthly contributions by the member or plan sponsor, and any consolidations by the plan member. In addition the advisor is usually paid an annual account servicing fee of between 0.25% and 0.50% on the total assets under administration at the lifeco.

Let’s assume an advisor lands a $3.0 million corporate retirement plan with employer and employee contributions of $300,000 per year that ends up after the first year being worth $3,500,000. So at the end of the first year the advisor will receive 1% of $3,300,000 plus 0.25% of $3,500,000 for a total of $41,750. If nothing changes the following year he will receive 1% of $300,000 plus 0.25% of $3,500,000 or a total of $11,750, and this goes on forever. If the advisor moves the client to a different lifeco the whole process starts over again. The lifecos then recover these commission costs out of the investment management fees they charge the individual plan members. This creates high costs within the lifecos which are passed onto their plan participants and that is why Open Access can be competitive.

Since Open Access acts as a fiduciary on behalf of the plan members, all fees are negotiated down as low as possible and passed on to the plan member unencumbered. We do this because we believe in complete fee transparency.

Good luck, this is a complex subject!

Here are some questions you might want to ask your advisor to help you navigate this complex area of mutual or segregated fund fees.

Mutual fund questions:-

  1. What is the all in fee I’m being charged by the fund company?

  2. Are the fees I’m paying retail or institutional?

  3. Does that fee include the Investment Management Fee?

  4. What is the total compensation that you, the advisor will receive if I invest in this mutual fund?

  5. For how many years will you receive these fees?

  6. Are any of these mutual funds being purchased on a Deferred Sales Charge basis?

  7. Are there any additional fees that I will be charged, such as fund switching fees, account investigation fees, redemption fees, or estate account processing fees?

Segregated fund questions:-

  1. What is the all in fee I’m being charged by the life insurance company?

  2. Are the fees I’m paying retail or institutional prices?

  3. What is the total compensation that you, the advisor will receive if I invest in this segregated fund?

  4. Are there any non-proprietary segregated funds in my portfolio?

  5. Are there any additional fees that I will be charged, such as fund switching fees, account investigation fees, redemption fees, or estate account processing fees?​

Warren Laing

Warren is the founder of Open Access, a company whose prime objective is to ensure plan members not only retire, but retire "well".

#mutualfunds #segregatedfunds #fundfees #investmentmanagementfees #feetransparency #feedisclosure #MER #grouprrsp #groupretirementplans #investing #fiduciary #plangovernance #TrailerFees #proprietaryfunds #CRM2 #CAPgovernance

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