RE: The case for banning embedded fees, Editorial, Investment Executive, April, 2016.
I read the editorial and was disappointed to first of all see a headline “The case for banning embedded fees.” Then the writer went on to call them embedded commissions, playing off the negative connotations most people have when they hear the word “commission.” The trailer fee is a management fee that compensates financial advisors for the work we do and is often the only pay we receive because most of us offer clients funds with 0% commission on the front end, so we make zero commission when we invest monies on a client’s behalf. There are still some dinosaur advisors selling funds with deferred sales charges, (DSC) which lock clients into a fund company for six to seven years. These advisors also earn a trailer fee but half of the normal fee. I believe DSC will eventually be banned, perhaps as early as the next decade.
Then, the writer speaks of a “conflict of interest” with embedded fees, as if it were fact, which it is not. Firstly, almost all mutual funds offer the same trailer fee, so how can this lead to a conflict of interest? If I offer a dividend fund from Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Fidelity Investments, AGF, Invesco or Mackenzie Investments (to name a few companies I work with), my compensation is the same, so there is no conflict. I look for the best product that will (hopefully) get my clients to where they want to go. On page 46 of the same issue of Investment Executive, a report from Investor Economics on the subject came to the conclusion that, “Where trailers were observed to play a role, Investor Economics found the impact was not significant when relative fund ratings were taken into account.” This is the result of a study versus the conclusion of someone who wrote an editorial. We have no idea what bias lay behind the editorial.
The editorial also stated that embedded fees, such as trailers, hinder transparency. That has some element of truth and is being addressed with CRM2, the final phase of which goes into effect in July 2016. [Beginning in 2017, clients will receive statements with much greater fee disclosure than is currently mandated by regulation.]
Banning embedded trailer fees would essentially force clients (and financial advisors) into more limited models of business. Clients in Canada can choose from many business models offered by financial advisors and chose one that suits their needs. They can choose to work with an advisor who doesn’t offer embedded fees. So why force clients and advisors to make this change when it’s already an option available to them?
Our industry has some problems, like any industry. I personally would like to see DSC funds banned as I don’t believe they serve the end consumer well. Once the embedded fees become transparent (which should happen soon), we will see where the next battle takes us.
I firmly believe professional financial advisors who offer funds with front ends at 0% give clients many options; the client isn’t locked into the financial institution, the client can sell or make trades, usually with no cost and, if dissatisfied, the client could move to another advisor. This model also pays (over time) a financial advisor for the work he/she has put in.
I have been a financial advisor for over 20 years and have been writing online for Fund Library for over seven years.
Bruce Loeppky
Portfolio Strategies Corp.
Surrey, B.C.
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