On-line broker E*Trade Canada announced drastic price cuts on mutual funds yesterday that should help do-it-yourself investors reap much higher returns.
E*Trade's new FundPlus Program allows clients to buy F-class funds, which have management expense ratios that are roughly a full percentage point below regular MERs.
"We're trying to respond to a direct need we see in the marketplace," said Bruce Seago, E*Trade Canada's chief operating officer. "The self-directed investor is definitely expressing interest in having access to actively managed funds, but at a cheaper cost. They don't necessarily want to pay 2 or 2.25 per cent, but they would be much more interested at 1 or 1.25 per cent."
Clients must pay commissions of $26.99 to buy or sell F-class funds, whereas they can trade regular funds at no charge in most cases. But these transaction costs are more than offset by the savings of the lower MER.
E*Trade said an extra percentage point of returns would amount to $510 on a $10,000 investment when compounded over five years, and $1,046 over 10 years.
Between 150 and 200 fund variations from two families, AIM Trimark and Elliott & Page, are part of FundPlus so far, but E*Trade is talking to other companies about joining.
"Only a couple of companies have said no," Mr. Seago said. "Most of the others are taking a look at it."
Many investors are unaware of this, but a percentage point or so of the typical load mutual fund's MER is accounted for by trailer fees paid to financial advisers for service to clients. F-class funds pay no trailers because they're designed to be held in fee-based accounts, where clients pay their advisers an annual fee of 1 or 2 per cent of their assets.
E*Trade's FundPlus program is a departure for on-line brokers, which have always collected trailer fees despite not offering any advice to clients. These brokers have justified taking trailers by pointing out the tools and research they offer clients to help them select funds.
Mr. Seago said the transaction fees on F-class funds will provide the same revenue on average as trailer fees on traditional funds. He also said the availability of F-class funds should help attract the savvy, established type of client that on-line brokers covet.
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