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ANALYSIS: Some investors could go into shock when new regulations require dealers to disclose fees in dollar amounts. Right now trailer fees, loads, administrative and marketing fees – and any other fees – can be expressed as a much more digestible percentage.
The change is expected to come in the third and final phase of what the industry has termed CRM2 – a long and complicated industry response that has been dragging on for about a decade in response to complaints that Canadians pay among the highest investment fees in the developed world. The new tabulating rules go into effect this July, but are not required to be disclosed until July 2017.
CRM2 covers a lot of ground, but this summer’s change strikes at the heart of the portion of mutual fund fees that go to the dealer firm, and ultimately the advisor who sits across the desk from you when you make your RRSP contributions. While it may seem like a free service, advisors are generally compensated through loads when funds are bought and sold, and fees relating to administration and marketing.
They are also compensated for through annual trailer fees baked into the annual mutual fund fee known as the management expense ratio (an average MER is about 2.5 percent). Trailer fees vary but they are usually around one percent of the total amount invested.
One percent may not seem like a lot, but in dollar terms it comes to $400 for a modest $40,000 mutual fund portfolio. A $1-million portfolio would attract an annual trailer fee of $10,000.
Throw in loads and other fees, along with the remainder of the MER, and an investor with $1 million in savings could realistically be facing an annual bill of $30,000 – and it doesn’t matter if the funds generate a return or lose money.
Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI