Mutual Fund Fees and the Value of Advice

The Canadian Securities Administrators (CSA) recently put out a discussion paper on Mutual Fund Fees, and requested comments from interested parties. A major focus of the CSA’s paper was their concern over the level of disclosure relating to both mutual funds fees in general, and the fees paid for advice and distribution.

MUTUAL FUND FEES AND THE VALUE OF ADVICE

MUTUAL FUND FEES AND THE VALUE OF ADVICE

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Overall cost of mutual fund ownership in Canada Trends in advisor compensation

Costs have fallen slightly, while fee structures have changed considerably

• The role of the financial advisor in helping investors make the right choices to ensure they maximize their wealth and reach their financial goals has never been as critical as it is now.

• Unfortunately, what defines advice is frequently distorted, to the point where the ‘value’ discussion is often presented by solely focussing on the costs associated with investing.

• Financial advisors are increasingly being compensated through trailing commissions versus transaction-related commissions, allowing costs to the investor to be amortized over a longer time horizon.

• This is a key benefit for investors considering the ongoing nature of financial planning services.

Overall costs between 2006-2011 have fallen modestly despite the 10-15 basis points of additional tax-related costs resulting from HST.

Strength exists in the current system

Valuetheir Advisor

Trusttheir Advisor

They receive

SoundGuidance from their Advisor

77% say their Advisor adds value above and beyond market performance

86% feel confident they will reach their goals

84% have a high level of trust in their primary Advisor

They

They

Source: The Economics of Loyalty, a survey commissioned by the IIAC and conducted by Advisor Impact, examines input from 1,018 investors across Canada, gathered between September and October 2012. The sample includes investors who work with an Investment Advisor, make or contribute to the financial decisions in their household and meet specific household asset criteria.

Source: Investor Economics, Insight, March 2012

Your clients have spoken. They need and value the advice you give.

0.19%2.12%

2006

1996

2011

2011

Tax cost resulting from

5% GST

Tax cost resulting from

13% HST

2.14% 2.10%

Commissions73%

Trailers27%

Commissions36%

Trailers64%

0.19%2.12%

2006

1996

2011

2011

Tax cost resulting from

5% GST

Tax cost resulting from

13% HST

2.14% 2.10%

Commissions73%

Trailers27%

Commissions36%

Trailers64%

MUTUAL FUND FEES AND THE VALUE OF ADVICE

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Mutual Fund ownership costs between Canada and the world’s largest market are nearly equal

• In Canada and the U.S., approximately 80% of mutual fund assets fall under the care of a financial advisor

• The major point of difference in cost is that Canadians must pay H.S.T. The unbundling of the advice fee from other fund expenses doesn’t seem to suggest lower overall costs to the investor.

0.19%

2.02%

2.21% 2.40%

1.70%

0.7%-0.9%

Fees external to TER (Advisor compensation)

Total cost range

Total Expense Ratio (TER)

Canada (Advice channels**)

*Note: This reflects an industry aggregate and is not specific to advise channels.**For all account types.

U.S.(Fee-based Programs)

Taxes*

Pre-tax CoO

1.00%-1.50%

Source: IFIC

The U.K. Model

As a result of the new Retail Distribution Review (RDR) rules which came into effect on January 1st of this year, investors are likely to be left adrift.

The evidence from other jurisdictions is alarming

43 million

31%

21%

The number of people that would be unable or unwilling to pay for advice. Their combined wealth is approximately 440 billion pounds.

The percentage of investors who report having a good understanding of investment products.

The percentage of financial advisors expected to keep most of their clients.

Source: Based on the executive summary and key findings from a paper entitled ‘The Guidance Gap-An investigation of the UK’s post-RDR savings and investment landscape’

Some key statistics:

The key new rule:

All financial advisors must charge their clients: A one-off fixed fee for advice, a fee based on an hourly rate, a fee based on the assets under management, or a combination of these.

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05/23/13-131042-01

MUTUAL FUND FEES AND THE VALUE OF ADVICE