Fund Costs and Advisor Compensation

September 18th, 2013

I have spent a lot of time recently trying to find an easy way to determine exactly what a recommended mutual fund is going to cost my clients. The results include bad news and good news. The bad news is that there is no easy way to find out how much a mutual fund is costing you right now.

For example, do not even think of asking for a copy of the prospectus. To illustrate my point, take a look at this site: BMO Simplified Prospectus. A prospectus is a legal document and reads like one, and they can be hundreds of pages long.

The good news is that this is going to change significantly, but not until July 2016.

The Canadian Securities Administrators are imposing disclosure rules on the mutual fund industry. In Ontario, this process is managed by the Ontario Securities Commission. Their rules for Point of Sale Disclosure for Mutual Funds read as follows:

“The Fund Facts is a document that is designed to give investors key information about a mutual fund, in language they can easily understand, at a time that is relevant to their investment decision.

Effective January 1, 2011, mutual fund companies are required to prepare and file a Fund Facts for each class or series of each of their mutual funds and to post the Fund Facts on their website.

Effective June 13, 2014, mutual fund companies are required to deliver the Fund Facts within two days of buying a conventional mutual fund. The prospectus for a mutual fund will continue to be available to investors on request.”

The Fund Fact reports are a dramatic improvement but can be hard to find on a firm’s web site. A major problem with Fund Facts is that a given fund can have many series. There is a different series for each way you can purchase a fund. The numbers for a full service advisor will be different than the numbers for a discount broker. For example the Fidelity Income Allocation Fund has a total of 10 different series. Unless you know which series you are purchasing, you are no further ahead.

Looking at the good news in detail, the CSA is implementing National Instrument 31-103. This instrument imposes new, more stringent disclosure information to be provided at an account opening and on quarterly statements. Of interest to me was the annual report of charges and compensation. It mandates disclosure to include, among other things, the “total amount of each transaction type of “operating charge” and “transaction charge” paid by the client for the previous year”, and “the amount of trailing commission received in respect of the account….”

Unfortunately, implementation of this section does not occur until July 15, 2016. So the question is what should an informed consumer of mutual fund products do in the interim? I recommend the following.

At the next opportunity, ask your investment advisor for a copy of the Fund Facts report for any funds that have been sold to you. Ask for a detailed review of the report. There are sections of the report that describe how the fund is invested, its investment performance and how risky it is. Of most importance to you as an investor is the section titled “How much does it cost?” This is your opportunity to understand the sales charges, the management expense ratio (MER) and any deferred sales charges that may apply. Finally there will be complete disclosure of trailing commissions that are paid to your advisor.

Understanding these numbers will put you in a position to:

  • Compare the costs of different funds which in addition to investment performance, will help you make better, informed decisions
  • Assess the value delivered to you by your advisor relative to the costs of doing business with them.

Remember our mantra “An informed consumer is an empowered consumer”.