In the May 20, 2017, Report on Business (Globe & Mail), there is a front page article by Clare O’Hara, Wealth Management Reporter, titled:
No advice, still a price: Fund fees draw fire
…an article which continues to expose not only how high mutual fund fees are in Canada, but how the compoicated fee structure continues to be exploited by the financial industry.
As I’ve written in the past, mutual funds in Canada are notorious for hidden, high, and complicated fees. And part of the complicated part is that there are different levels of fees for the same mutual fund.
You might ask, “Nanci, are you telling me that if Janet and I purchase the same mutual fund, she could be paying 0.75% and I could be paying 2.25%–for the exact same investments?”
And that is exactly what I am saying.
The justification (from the mutual fund industry) is that the different levels of fees are to provide compensation to any salesperson or financial advisor for the expert financial and investing advice they might provide you.
To be clear, it is the Series A version of any mutual fund that allows this high fee that is for financial and investing advice.
Again, this is what the industry calls embedded commissions, but what I (and many other financial writers) call hidden fees.
“Nanci, are you telling me that if Janet and I purchase the same mutual fund, she could be paying 0.75% and I could be paying 2.25%–for the exact same investments?”
And what was the point of Ms. O’Hara’s article?
That 83% of mutual funds sold through DIY brokerage houses (i.e. NO advice given or provided) are Series A mutual funds.
Do you understand what this means?
The brokerage houses are enabling you to purchase high fee mutual funds, up to 2% higher, even though you are not receiving any advice from them. And you know from Day 9, that 2% in additional fees can be devastating to a portfolio, costing you upwards of 30% of your annual income in retirement.
Nothing. Absolutely nothing.
Ms. O’Hara reports that of the 30B in mutual funds held at discount brokerage houses, 25B remain in fund series that bundle (aka hiding) an advice fee within the product.
Even though no advice is ever given.
At even just 1% in extra, hidden fees (although I suspect it is closer to 1.5%), that is $250,000,000 in fees that they are not entitled to because they did not earn it.
Once again, your money, in their pocket. For nothing.
At the risk of sounding like a broken record (apologies to those of you who do not know what records are!), are you really ok with, from age 65 – 100, having an income of $70,000/year instead of $100,000/year?
Just to enrich the financial industry? Are you that generous?
All right. So why/how is it even possible for discount brokerages to sell Series A funds? If they do not provide advice, ever, how is it possible that 83% of the mutual funds they sell include embedded fees for providing advice.
Good question. I don’t have an answer except, “Welcome to Canada where the financial industry–including banking, investing and insurance–is not your friend.”
I commend Ms. O’Hara for bringing this information to light. I was aware of the problem of financial advisors selling Series A mutual funds, and then not providing much advice if any. However, I did not realize that discount brokerages — who are not even able to provide advice — are permitted to sell the Series A version of mutual funds.
What a mess.
I will wrap this blog post up with a comment that rather than trying to wade through the overgrown weeds that are mutual funds in Canada, think about purchasing low-fee index funds or ETFs.
It really is that simple.
PS. You are one decision away from leaving the mutual fund industry in the dust. Vote with your dollars and move your money out of mutual funds once and for all. If you are interested in a step-by-step MasterClass on exactly how to do this (not just why), check out my online course http://zerotoportfolio.com.
You won’t be disappointed.
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