How to marry mutual funds with fee-based compensation

A veteran investor highlights how a hybrid fee structure could save Canada’s mutual fund industry

How to marry mutual funds with fee-based compensation
Read between the lines of a recent column from Gordon Pape in the Globe and Mail and you’ll find that the veteran financial commentator is advocating for a hybrid fee structure that separates product from advice while eliminating trailer fees to provide Canadian investors the best of both worlds.
“I strongly support the idea of having totally unbundled compensation for advice and cost of product,” said John De Goey, a portfolio manager with Burgeonvest Bick Securities Ltd. Bundling “is unfair and prejudicial against do-it-yourself investors and that’s not fair.”
Pape’s primary argument is that trailer fees reduce investment returns. The Cummings Report, along with the Brondesbury Report, confirmed this to be the case. Pape concluded his column by suggesting regulators are gunning for trailer fees and their possible elimination at some point in the future.
This debate is arguably the biggest amongst advisors in this country. One that soon may come to a head.
But a secondary argument made by Pape in the Globe article calls for a hybrid fee structure where Canadians would have – as De Goey suggests – totally unbundled compensation. 
“A world free of trailer fees would give do-it-yourself investors access to the equivalent of F units without paying an adviser fee,” wrote Pape in the Globe and Mail. “Those who want advice would be able to negotiate a fee based on the degree of service required, rather than automatically having a charge levied against their fund returns.”
Everybody wins. But why not go a step further and implement negotiated commissions as exist in real estate?
In this scenario there would be just two classes of mutual funds – A and B – neither with trailer fees. The Class A would have an MER of 0.90% or whatever the existing Class F fund currently charges clients using fee-based advice; the Class B would have an MER of 0.45% (again, just an example) and those would only be available to institutional investors with $1 million or more to invest.
That takes care of the product.
All investors would then be open to negotiate with advisors on the fees for advice. Advisors who are fee-based using mutual funds are already doing this but negotiated fees would likely lower the client’s overall costs.
Advocis suggests that the Cummings Report did not take into account the monetary value of the advice provided to clients. In addition, they believe Canadians are generally happy with the existing commission system for mutual funds. This might be so but only in the absence of real alternatives.
“Greg Pollock’s [Advocis CEO] comments continue to rankle me. He always says, ‘on preliminary review it doesn’t take into account the cost of advice,’ said De Goey. “That’s because the Cummings Report was dealing with how embedded compensation causes bias, not the value of the advice. So, of course you didn’t find that; it wasn’t the mandate of the study.”