The shoe is now on the other foot, with fee-based advisors taking heat for failing to disclose all the MERs associated with ETFs – costs that sometimes approach those of mutual funds.
“The fee-based structure gives clients a more transparent look at what is going on with a client’s account, but that doesn’t mean there aren’t hidden fees, especially when it comes to ETF funds and their MERs,” AJ Chase, a wealth advisor with Scotia McLeod, told WP. Investors may only think they are paying a fee as a percentage agreed upon with their advisor, and not any additional embedded fees.”
“ETFs can be used within a fee-based account. They have embedded fees, similar to many mutual funds. These embedded fees can range from .07 per cent to .99 per cent or more. Many investors may not know about these hidden fees. Investors may only think they are paying a fee as a percentage agreed upon with their advisor, and not any additional embedded fees. Also, with a fee-based practice, an investor’s tax advisor might be a able to write-off non-registered fees charged to each account."
The advisor’s comments are part of the ongoing debate about whether fee-based compensation as a wholesale replacement for embedded commissions – after full CRM2 implementation – will eliminate some of the concerns around hidden MERs, more usually associated with mutual funds. They won’t, point out advisors.
“The end-user client always pays for both the cost of advice and the cost of the products used to implement that advice,” said John DeGoey, a portfolio manager at Burgeonvest Bick Securities Ltd. “Telling clients only about the cost of advice is, in my opinion, only telling half the story,” he said. “In that regard, regulators have massively dropped the ball.”
New transparency rules will ostensibly open the eyes of investors unaware of what fees they’re paying, argues DeGoey, but advisors could face two potential issues with ETFs and hidden MERs: they’ll have to justify charging higher advisory fees for individual securities and F-class funds.
“This is an opportunity to teach ordinary investors two lessons: advice is not free, and the cost of investment products matter greatly. Drawing attention to one while simultaneously ignoring the other is regrettable to say the least.”