A breakthrough in low-cost investing has fizzled because of a mutual fund company's trepidations.
A week ago, we seemed to be at the beginning of a new era in which do-it-yourself investors would be able to pay less for mutual funds than people who enlisted the help of a financial adviser.
On-line broker E*Trade Canada set things in motion by announcing it would sell F-class mutual funds from two fund families, Elliott & Page and AIM Funds Management, which comprises the AIM and Trimark families. F-class funds are an outstanding bargain because they have a management expense ratio (MER) that can be a full percentage point below what's typical for equity funds.
Elliott & Page has a respectable family of funds, but AIM was the key to this announcement because it's much larger and has several first-class products. Problem is, AIM won't allow its F-class funds to be sold by E*Trade after all.
What exactly happened here is unclear, to say the least. AIM says it never signed off on the news release E*Trade sent out March 30, although it had been talking to the company about F-class funds. "We didn't have an agreement with E*Trade, and it doesn't look like we're going to," said Dwayne Dreger, vice-president of communications.
Hill & Knowlton, E*Trade's public relations company, said it had full approval for the release from AIM, and that the company was fully on board. "We don't issue releases unless the people who are referenced have approved it," said a Hill & Knowlton representative. "All of it was good to go last week, and obviously something's happened."
Whatever transpired, Elliott & Page is the only company to allow E*Trade to sell its F-class funds. Until E*Trade signs up a fund industry giant like AIM, then, the F-class revolution for do-it-yourself investors is effectively on hold.
Blame this setback on the folks at AIM and, by extension, any other fund companies that won't make their F-class funds available to self-directed investors. By taking this position, they've made it clear that what matters most to them is keeping their sales force -- read: financial advisers -- sleek, fat and happy.
AIM obviously cares about investors, too. In fact, the company offers one of the better combinations of reasonable costs and solid performance.
It's just that the advisers are the company's true clients, not investors. Advisers are responsible for the vast majority of fund sales in Canada and they need to get paid for their efforts.
Load fund companies like AIM do this by embedding trailer fees in the management expense ratios of their mutual funds. Trailer fees are paid continuously over the years and eat up anywhere from 0.5 to one percentage point or more of a fund's MER, depending on the company and type of fund.
A good financial adviser can easily justify receiving trailer fees in addition to any commissions generated on the sale of funds. Regular portfolio rebalancing, periodic update meetings, tax assistance and other areas of financial planning -- all of these are services that a client might receive from an adviser who collects trailers.
F-class funds came into being as a tool for fee-based advisers, who are paid an annual fee for their services. Trailer fees are stripped out of an F-class fund to reflect the fact that the adviser is compensated elsewhere.
Logic suggests F-class would also be appropriate in a situation where there's no advice at all, say, when an investor uses an on-line broker. But AIM obviously doesn't buy this argument.
The official line from the company is that its F-class funds were created strictly for use in fee-based accounts. More likely, AIM is concerned that making F-class funds widely available would undermine advisers.
This is old-time, defensive thinking. The self-directed investors who might buy F-class funds are a world apart from the people who legitimately prefer to have the help of an adviser.
By offering F-class funds to do-it-yourselfers, AIM would stand to make many new customers. As for advisers, surely it's not asking too much that they be ready to make clients understand and accept that they have to pay full price for their funds.
An example of the sort of investor who's being discriminated against by AIM and others is Don McCullough, a retired Muskoka, Ont., resident who holds seven mutual funds in an on-line brokerage account, some of which he has owned for as long as 20 years.
Mr. McCullough read about F-class funds in last Saturday's Personal Finance column and decided they're right for him.
"Simply put, why not?" Mr. McCullough said in an interview. "These MERs that the fund companies charge are just debilitating."
Correction, Mr. McCullough. MERs are debilitating if, like you, an investor is forced to pay for advice he doesn't receive.
Kudos to Elliott & Page for acknowledging this, and to any other fund companies with the guts to step up and make their F-class funds available.
AIM Funds Management
Lineup: 48 funds sold under the AIM and Trimark names
Most widely held funds: Trimark Select Growth, Trimark Select Canadian Growth, Trimark Fund, Trimark Select Balanced and Trimark Canadian
Ranking: Fourth largest by assets
Parent Company: Amvescap PLC.
© 2007 The Globe and Mail. All rights reserved.
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