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Wealth Professional | 02 Nov 2015, 08:15 AM Agree 0
While the Cummings Report has reignited the debate about fees, it also brings into question whether regulators should cap trailer fees or even ban them
  • Gary Gosnell | 02 Nov 2015, 10:56 AM Agree 0
    The President of Invesco Canada, Peter Intraligi, addressed this very topic with a letter addressing the Cummings Report titled: Invesco Responds To CSA on Mutual Fund Fees.

    I took the time to address Mr. Intraligi's response and will enclose it here. Hello Mr. Intraligi:

    Your response to the CSA report is reasonable, but it logically infers further points for regulatory consideration. Apparently Invesco has lobbied for a regulatory cap on trailing commissions at 1%. Have you also lobbied for a regulatory cap on fee for service at 1%? My understanding is that there is a far greater proportion of assets being
    charged more than 1% on a fee for service basis than on an embedded trailing commission basis. I have been informed by various third parties, that some dealers do not allow less than 1.25% on a fee for service basis. Fee for service, seems to be one important action that the investment industry has taken, as an early response to dealing with the implications of CRM II.

    Your response, and the CSA itself, only seems concerned with sales/distribution costs of the mutual fund industry. Could you also publically endorse a regulatory cap on management fees charged by fund companies at 1%?

    Obviously, much time, money, and effort is being put into CRM II to address regulatory concerns about investment fees and their transparency, this is my small effort in hoping to improve that result, while meeting with the spirit of your own response.

    Thank You
  • Brad Jardine | 02 Nov 2015, 11:25 AM Agree 0
    Cap them asap. Let's be proactive for a change.
  • Next Generation | 02 Nov 2015, 11:34 AM Agree 0
    I think the biggest part these reports are missing is that they don't actually compare embedded trailing commissions to what clients are paying under 'fee based' models using F-class funds or securities. I myself have came across many clients - usually working with Bank-owned brokerages - that are paying in excess of 1% in compensation. I have seen these get as high as 2% + the f-class fees, etc. This seems excessive, although I am all for the client having the final say provided they are aware what they are paying.
  • Wealth Advisor | 02 Nov 2015, 11:56 AM Agree 0
    Capping remuneration is always a controversial subject for all occupations.

    Trailers currently go from 0% to 1.0% with the outliers exceeding 1.0%.

    Fees currently start at 1.5% to 1.0% with the outliers ( HNW investors <1.0%)

    Trailers are really, embedded AUM fees.
    Fees are really, unembedded AUM fees.

    So if you are going to cap trailers, you will of course have to cap fees too.
  • David McDonald | 02 Nov 2015, 02:00 PM Agree 0
    Wow! If only I had known! I have just received an advisor asset statement which records total assets under my management and also my trailer fees. I notice that slightly under 66% of the assets earn a trailer fee of 0.5%! The other third earn a trailer fee of 1.00% Darn this CFP which forces me to put my clients' interests first. Roll on the day when I can charge 1%: Well slightly more because only two of the clients with assets on the aforementioned AAS have more than $250,000 to invest. My dealer takes a % and so I receive considerably less than 1%.
    Now how do I charge a fee to someone who invests $50.00 per month into an RESP with occasional larger sums into a TFSA? Or are these people to be cast adrift?
  • Jason Watt | 02 Nov 2015, 08:12 PM Agree 0
    Thanks for giving those examples. This was my exact question
  • Niki | 03 Nov 2015, 11:39 AM Agree 0
    I am inexperienced with funds that pay trailers at 1.5-1.75%. This is ridiculous! So what funds are they? IG? Anyone know?
  • Debbie | 03 Nov 2015, 08:52 PM Agree 0
    David, How much would you usually receive from commission for advising someone to invest $50 a month on an annual basis into an RESP with the occasional larger sum into a TFSA?
  • Tim Affolter | 03 Nov 2015, 09:57 PM Agree 0
    I'm guessing that much of the "slightly under 66% of assets that earn a trailer of 0.5%" were DSC to begin with. Unless two-thirds of your assets are in bond funds...? I'd be very surprised at that, given the equity bias in most portfolios right now.

    Let's be honest here. A 5% up-front DSC still feeds 1% into the MER calculation. It's not the trailer that the advisor earns, it's the advisory fee that the client pays, be that flat fee or a percentage of AUM (embedded or not.)
  • Benjamin Felix (PWL Capital) | 04 Nov 2015, 12:35 PM Agree 0
    @Wealth Advisor: Capping fees is not related to capping trailers. In the current state, advisors recommendations may be influenced by a fund with a higher trailer. A fee based advisor could be charging 4% (not in reality, but hypothetically), and still make unbiased investment recommendations. The problem with trailers goes deeper than just needing a cap. Index funds and other low cost investment products don't pay trailing commissions. A commission based advisor will only recommend funds that pay... commissions. These tend to be actively managed funds with high MERs.
  • David McDonald | 04 Nov 2015, 03:35 PM Agree 0
    Debbie. 0.77% for RESPs until oldest child is 14 and then 0% FEL .
    Tim. Don't make assumptions. I do not use DSC and have not done so since about 1998 (about 3 years after I became independent and had left a company that shall remain nameless. Except for RESPs, I offer my clients 0% FEL. The 66% from one bank mutual fund is .30%. Conservative portion of clients' portfolios: not Bond funds. Same problem as possibly existed in the C report: Assumptions made and -to use an industry expression - failure to 'd
    rill' down into stats.
  • David McDonald | 04 Nov 2015, 03:37 PM Agree 0
    Oops Debbie. RESPs: 1% LSC until oldest child is 14 and then 0% FEL.
    TFSAs: 0% FEL
  • Wealth Advisor | 04 Nov 2015, 04:56 PM Agree 0
    Trailers are AUM embedded fees, Fees are unembedded AUM fees so they are indeed related. fees and commissions are not mutually exclusive and advisors can happily use both in an appropriate fashion, i.e. trailers for LNW clients and fees for HNW clients. Plus don't forget the client-name fee-for-service accounts. My view is to keep both models.

    When trailers were eliminated for MMF after the U.S. Financial Crisis, I stopped selling them and "skewed" my recommendations to HISAs. Therefore Cummings is perfectly correct, remuneration does skew investment recommendations.
    I think we need to do a study and see why advisors haven't put all of their clients in bank owned mutual funds and earn an extra 25% in annual income. Generally, clients prefer to pay low commissions versus high fees anytime and advisors can certainly do the math to see what is in the best economic interest of the investor.
    As investor advocates are pointing out fee-based accounts have their sets of conflicts of interests and we should not consider them as a panacea for everyone.
    And yes, for your nominee fee-based account you certainly can use index related investments, low MER or no MER investments.
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