The investment industry is hailing CRM2, the Canadian Securities Administrators’ second round of changes under the Client Relationship Model, as a major concession to fee-burdened investors. Clients will now see their advisor fees expressed as dollars as well as percentages.
But it doesn’t change the fact that Canadians pay the highest mutual fund fees in the developed world, or that the bulk of mutual fund fees will remain shrouded in percentages.
Here’s what mutual fund providers are required, and not required, to disclose in dollars:
- Advisor fees – including commissions, loads and trailer fees – must be disclosed in dollars on a regular basis. A typical trailer fee is one per cent on the total invested, which translates into $1,000 on every $100,000. That may come as a surprise to many investors when you consider that a recent survey by Tangerine found 36 per cent of respondents didn’t think they pay fees at all.
- Those trailer fees are embedded in a much larger management expense ratio (MER), which does not need to be expressed in dollars. A typical MER of 2.5 per cent translates into $2,500 on $100,000 but investors will need to do their own math to see what they are paying.
- Segregated funds are entirely exempt from the new disclosure rules because they are considered insurance products and fall under the jurisdiction of a different regulator. They are insurance products because all or part of the principal is guaranteed. MERs on segregated funds can be as high as four percent, which translates into $4,000 for every $100,000 invested each year.
- Some advisors have always expressed their fees in dollars, so CRM2 won’t make a difference. Investor advocates are hoping the new rules will lead to the abolition of trailer fees altogether.
In the meantime, there are concerns some advisors may attempt to avoid the scrutiny of fees in dollars by directing clients to segregated funds. The best action for investors is to read the mutual fund prospectus, and keep asking about fees.
Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI