Investors split over embedded fees: survey

“Despite the closeness of the two options, there are no obviously discernible patterns regarding the type of investor who would prefer to be charged a direct fee for service. Indeed, it appears that the compensation model utilizing mutual fund fees is slightly preferred by all investor types regardless of demographic, socio-economic, attitudinal or behavioural characteristics, by a five-to-four margin overall,” says the report, which was prepared for IFIC by market research firm, POLLARA Inc.

The report notes that 14% say they already pay direct fees to their advisor; and that this model is most frequently used by those who depend most heavily on their advisor. The likelihood of paying a direct fee also correlates positively with the value of investments, it notes.

The survey also asked investors whether they would continue using an advisor if a direct charge was implemented by their advisor that is higher than the embedded fee they are currently paying. In that scenario, about half of investors say they would probably stay with their advisor (16% are absolutely certain and 33% are somewhat certain), whereas 47% say they’d be unlikely to continue to do so.

The survey doesn’t ask what investors’ intentions would be if those direct charges were the same, or lower, than current embedded fees. The survey does ask how much investors would be willing to pay, in both dollar terms, and percentage terms, but the report doesn’t reveal the answers to those questions.

The report also indicates that there has been some erosion in investors’ confidence in their understanding of these issues. It says that 70% of investors say they are at least somewhat confident in their knowledge of fees, but only 10% say they are “very confident”, which is the lowest proportion recorded since that question was first asked in 2010, it says. Additionally, 17% are not very confident, 9% are not at all confident, and 4% don’t know.

Indeed, the survey found that 69% believe that some of the fees charged within funds goes to compensate advisors; while 16% said they didn’t think that’s the case, and 7% said definitely not; while 9% didn’t know.

Less than two thirds of investors (62%) remember having a discussion with their advisor about fees when they made their most recent mutual fund purchase, it finds. And, just over half (52%) remember discussing compensation, while 55% remember talking about MERs, it says. These percentages “have remained highly consistent over the past four years”, it says.

In general, investors also indicate that their satisfaction with the information received from fund companies is on the decline. Just over half (56%) say that the information they have received answered most, or all, of their questions. This has been on the decline since 2006, it notes, when 68% said the information from fund companies answered most or all of their questions. And, just 14% say the information answered all of their questions, which is the lowest proportion since 2006.

Nevertheless, 92% of investors say they feel at least somewhat comfortable they could make an informed decision given the information available (38% say they are very comfortable, and 54% report being somewhat comfortable). And, 89% say that their advisor discussed the suitability of mutual funds to their investment goals.

Moreover, 83% of investors say they are satisfied (63%), or very satisfied (20%), with the advice they received; and that they continue to trust their advisor to give them sound advice (54% strongly agree, 40% agree), and most believe that they get better returns than they would without an advisor (37% strongly agree, 53% agree).

The report is based ion interviews with 1,004 mutual fund holders, 18 or older, who make all or some of the decisions regarding mutual fund purchases in their household. The interviews were conducted between June 23 and July 7. And, the survey has an overall margin for error of plus or minus three points.