globeandmail.com
    Globe Advisor is moving, click here to see

Education Centre
 

Home Page 

Investment Strategies 

Tax Zone 

Financial Planning 

Estate and Insurance 

Financial Courses 

Resources 

 
From The Archives
Canadian MoneySaver 

Mutual Fund Insight 

Value Investing Guide 

The Wise Investor 

   
    

Investors should see where cash goes, despite cost

By ROB CARRICK
00:00 EDT Thursday, October 02, 2003   

One mutual fund industry executive's take on the idea of showing investors exactly how much they're paying in fund fees: Good idea in theory, but not for us.

"I think it would be great," said the executive, who spoke candidly on the condition of anonymity. "The problem is that I don't think advisers and dealers would want this information to cloud their discussions with investors about what works for them."

Last Thursday's Personal Finance column suggested that fund companies provide a dollars-and-cents accounting on client statements of how much investors paid in fees, and where these fees went.

As it stands, these statements tell you nothing about how much you're paying your fund company. You can use a fund's management expense ratio to get an idea of what your costs are, or you can burrow into the fund's simplified prospectus.

Either way, though, you're getting general information that says nothing about what you are paying.

The fund industry executive thinks that disclosing fees on a client statement would bog advisers down in conversations with clients about fees and take the focus from long-term investing and asset allocation.

"It is a valid argument," this individual said. "I can see it happening. I use my mother as an example.

"Let's say she sits down with a financial planner and then she looks at her statement and says, 'I lost $2,000 on my investment last year and you got paid $500,' or whatever.

"Now, they get into a discussion justifying the fee as opposed to something like, 'This investment has gone down, but here's our target for the long term; this is what we're trying to accomplish for you.' "

There's a grain of legitimacy to this. Probably, there will be people who obsess over fund fees they've only just woken up to. Maybe some will want to do something wrong-headed based on unproductive fund fees paid over a single quarter or year.

But so what? It's the job of financial advisers to advise. Here's a perfect chance for them to do that.

More important, though, fee disclosure will give investors a key piece of information they need to make rational decisions about the value they get from their fund companies and advisers.

There are many hundreds of mutual funds with no excuse for living other than the fact that they generate fees for their firms. Fund fee disclosure might help more investors free themselves from these fund traps.

Another reservation the fund executive has about dollars-and-cents fund fee disclosure is cost. Computer systems need to be adjusted, plus there are printing costs related to the reconfiguration of client statements.

"It does take effort," the fund executive said. "It does cost money, and that ultimately would end up having to be paid by the unitholder."

How much would it cost investors? Not a lot, really, and maybe nothing in the end.

First, the fund executive said that as a general rule, the average Canadian equity fund's MER of 2.7 per cent is about 0.22 to 0.25 per cent composed of operating expenses for the fund. That includes things such as taxes, accounting fees and so on.

How much would fund fee disclosure on client statements add to an MER? A few one-hundredths of a percentage point, the fund executive said.

It might even be possible for a fund company to eat the cost of improved fee disclosure, the executive said.

This could happen if investors started moving back into mutual funds in a big way, thereby allowing fund companies to generate more revenue by applying their MERs against a larger revenue base.

The fund executive said that if investors are really curious about how much they're paying in fund fees, they could calculate the amount themselves.

All they have to do is find their quarterly statements for the past 12 months and average out the value of their holdings in each fund they own.

The next and final step is to multiply the average value of each fund by its MER. What you're left with is a rough idea of the amount paid in fund fees.

Of course, there's no indication here of where the money went. Done properly, dollars-and-cents fund fee disclosure would tell you how much of your fees went to the fund company to run the fund and how much went to your adviser, dealer or broker to cover the cost of continuing service to you.

Here, the fund industry executive suggests investors go to their fund company's simplified prospectus.

"Technically, the information is there for investors," the executive said.

"No one's hiding anything. If you go through the prospectus, you can definitely figure out what you're paying."

There is quite a lot of information in a fund prospectus and it's surprisingly comprehensible in many instances.

Not when it comes to fees, though.

Too many fund prospectuses are vague, sloppy with language and evasive when it comes to providing a clear accounting of what investors pay and where the money goes.

The fund industry has some concerns about dollar-and-cents fund fee disclosure, and that's fair. But so is telling people exactly what they're paying for a product.

rcarrick@globeandmail.ca

 

 

In The News
 
Mutual Fund News
Mutual Funds: A Special Investigation
Mergers & Acquisitions
Income Trusts
Streetwise Insight
Economic Insight
Analysts and Investment Banking
 
Education Centre
 
Home Page 
Investment Strategies 
Tax Zone
Financial Planning
Estate and Insurance 
Financial Courses 
Canadian MoneySaver
Mutual Fund Insight
The Wise Investor 
Value Investing Guide 
Resources
 
Newswires
 
Canada NewsWire
CCN Matthews
Filing Services Canada
GlobeNewsWire
PR Newswire
Search the News
  Symbol*

 
Keyword(s)
  Industry* 

Source 
 The Globe and Mail
 Reuters
 Canadian Newswires
 U.S. Newswires
* Can only be used when searching The Globe and Mail and Newswires.