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Dale Jackson

Your Personal Investor

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The investment industry has been touting the latest fee disclosure rules as a big victory for the small investor. It’s more like a tiny advance in long-fought war that the average investor is losing.

July 14 is the deadline for advisory dealerships to comply with what is called CRM2, which is intended to make performance and fees more transparent. Clients will receive more details about how their investments are performing but the big change requires advisor fees to be expressed in dollar amounts, along with percentages. Most Canadians invest through mutual funds, which compensate advisors through annual trailing commissions and loads when the funds are bought or sold.

If you don’t think fees expressed in dollars is a big deal consider that the typical annual trailer fee to compensate the fund-selling advisor is one per cent of the assets invested. That’s $3,000 on a $300,000 investment each year. Imagine opening up your statement at the end of the year and seeing a $3,000 charge.   

The industry is well aware of the impact of dollar fee disclosure and that’s why it has been dragging its heels on CRM2. The initiative was launched over a decade ago in response to complaints that Canadian investors pay the highest fees in the developed world. 

According to independent monitors such as Morningstar Canada, Canadians still pay the highest investment fees but the mutual fund industry has managed to keep the bulk of mutual fund fees hidden.

That trailer fee is embedded in the management expense ratio (MER) charged annually by the mutual fund company. Again using $300,000 in investments as an example, a typical 2.5 per cent MER on an equity fund comes to $7,500 each year. Only the one per cent trailer fee is revealed in dollars, while the remaining $4,500 stays hidden.

But the secrecy doesn’t end there. Segregated funds - mutual funds that insure most of the principal - are exempt from CRM2 because they are considered insurance products. MERs on segregated funds can be higher than 3.5 per cent, which comes to $10,500 each year on $300,000 invested. 

Industry insiders have privately expressed concern that unscrupulous advisors will steer clients toward segregated funds to avoid disclosing the true cost of investing.