Impose MER disclosure rules on funds?

Impose MER disclosure rules on funds?

Impose MER disclosure rules on funds? Industry statistics indicate that only 10% of the approximately 2,700 mutual funds in this country pay trailer fees of more than 1% leading some to suggest MER guidelines are a better solution for solving exorbitant fees.
 
“Further to the idea of putting a cap on management fees, I think that I would prefer that someone set out fee guidelines for various types of funds instead of rules,” Toronto advisor Mark Matsumoto told WP while discussing an alternative to capping trailers. “A rule might require a fund to disclose if their fees are above guidelines on client statements. This would not force high cost operations out of business, but would motivate them to become more efficient or to explain themselves.”
 
In the example from yesterday’s story about the 1.75% trailer, a guideline could be implemented that requires dealers to indicate on client statements when those clients own funds with MERs higher than 2.5%. It wouldn’t be against the rules to hold these funds but it might shame advisors, dealers and fund companies to push fees lower.
 
CRM3, anyone?
 
While this argument has definite merit it shouldn’t mean for a second that the fund companies are off the hook simply by dropping management fees below a suggested, but not required, 2.5% ceiling.
 
That’s because there’s still the issue of trailer fees.
 
As the Cummings Report pointed out, higher trailers leads to higher fund flows regardless of past performance. Under these fund guidelines a fund could have a 2.5% MER with a trailer of 1.75% without having to disclose anything to the client beyond CRM2 – a loss leader if you will.
 
“Personally, I would avoid such high trailer funds simply due to the fact I don’t want to be in a conflict with my client,” a veteran west coast advisor told WP. “If other advisors did that as well, then the fund company’s sales would suffer (thereby shooting itself in the foot) which is likely the opposite of what they [fund company] expected to happen by offering such a high trailer in the first place. Frankly I am insulted a fund company would think that advisors could be so easily bought.”
 
Capped trailers or MERs or both? Advisors have your say.
4 Comments
  • Debbie 2015-11-04 9:51:37 AM
    "Frankly I am insulted a fund company would think that advisors could be so easily bought.” but according to the study advisors apparently are.
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  • Wealth Advisor 2015-11-04 10:22:35 AM
    A shame based list??
    Highly doubtful that will happen.

    I think the SROs have to step up to plate and look at this way: If we can't regulate ourselves -somebody will regulate it for us.

    We could go back full circle and bring back front-end loads of 5%. That would certainly fix the trailer problem although I suspect the holding period of the average fund might decline. MERs of course are completely unaffected by steep loads.

    I do note that 8% loads were acceptable in the 1980's, perhaps 4% in the earlier 90's and 0% in the 2000's. Therefore if maximum total remuneration is capped today at 1% then what should it be in 2020?

    As only 10% of fund companies have trailers > 1.0 the obvious question is this:
    What dollar amount in percent is > 1.0%, greater than 1.25%, greater than 1.5%, etc. Draw up a bar chart, binomial distribution curve. Let's see some sigmas and determine if Cummings report conclusions have any merit. Personally, I think the report reiterates the obvious; that some sales are skewed by higher remuneration. However, is it significant? is the problem really a problem or an outlier. If it is an outlier is far easier to deal with a handful of firms directly rather than eviscerating the entire investment industry.
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  • Graham 2015-11-04 12:22:31 PM
    Reminds me of a story an older broker told me who worked in Vancouver many years ago. Said you could eat a free lunch every day as one company or another was doing a presentation pitch to brokers. The worse the investment, the better the lunch. The speculative wild junior resource companies served steak and lobster. The good quality companies served sandwiches. Sounds like some fund companies are trying to serve steak.
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