Clarity Coming on Investment Fees

May 21st, 2016

When I ask a client what they are being charged for their mutual fund investments, the answer is usually “I don’t know, but I don’t think that I am being charged anything at all. In fact, every once in a while my advisor takes me out for a very nice lunch.”.

My clients’ views are typical of retail investors at large. A Canadian survey of nearly a thousand investors and a similar number of investment advisors found that most investors thought that they were not being charged anything on the mutual funds that they owned.

The responses of the investment advisors told another story altogether: most advisors said they were paid commissions and servicing fees calculated as a percentage of the amount purchased and of the assets under their administration.

This set me off on a quest to develop a process that my clients could use to find out how much they were being charged on their assets. To keep things in perspective, I have no prejudice against commission based sales. But I firmly believe that if you do not know what a service is costing you, you are not in a position to determine whether you are getting good value for your money.
Over these last few years, my research has uncovered the following:

  • Until now, it has been nearly impossible to determine the amount of money that you are paying your investment management firm.
  • Rigorous studies have proven that sales of a particular mutual fund are determined more by advisor compensation, than by its investment performance or its suitability for the client.
  • The emergence of “closet” index funds. These are funds which claim to be actively managed in order to outperform the market but which, in reality, have assets which closely track the market index. The fees for these funds typically range from 2 to 3% while same performance can be earned from an exchange traded index fund which would charge you ¼ to ½ %. The difference comes out of your pocket. (Globe & Mail Unlimited subscribers can learn more about “closet” index funds here.)

Effective July 1st of this year, industry regulators will require that all investment dealers, including the banks, must report to clients:

  • The amount that they have charged the client, excluding fees paid to the product manufacturer.
  • The investment rate of return earned on that client’s funds.

Finally, you will be in a position to compare the levels of service you are receiving from your advisor with what that service is costing you. Perhaps more importantly, you will be able to make that comparison for her (his) competitors.