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CI plans radical overhaul of fund fee structure

One of the country's largest mutual fund companies is proposing major changes in pricing that would mean lower and more transparent fees for investors.

CI Fund Management Inc. would start by reducing fees on its funds to make them more competitive with the rest of the industry. Then, it would lock in those fees and publicize them, so that investors know exactly what it costs to own CI funds.

Fee cuts are always welcome, but improved fee disclosure would also do some real good for investors. The current practice for many fund companies is to charge what they feel like charging from year to year, without ever putting a definitive price tag on a fund. Worse, fund companies report their fees in a way that means the information is often out of date, sometimes by years.

"What we want to do is say, 'This is the charge, this is what it will always be,'" said Bill Holland, CI's president and CEO.

What if the stock market falls and CI's locked-in fees don't generate enough profit for the company? "If the market goes down, that's our tough luck," Mr. Holland said in an interview that was prompted by a Personal Finance column earlier this month on fund fees.

Canada's mutual fund industry has been notoriously resistant to the idea of competing on price, unlike in the United States, where giants such as Vanguard and Fidelity aggressively battle with each other with fee cuts. Now, things are finally changing here. Seventh-ranked Fidelity Investments Canada trimmed fees on some fund variations early this year, while third-ranked CI has developed its own more radical proposal.

The net result for investors is higher returns. Because fund companies cover their fees out of the gains generated by their funds, lower fees means more left over for unitholders. These additional gains might not seem like much over a year or two, but they can add up to serious amounts over longer periods.

Mr. Holland said CI will go to the Ontario Securities Commission in the next couple of weeks to see if its proposed changes raise any regulatory issues. Among the changes the company plans is a drop in the management expense ratio (MER) on the $3-billion CI Harbour Fund.

The MER on the CI Harbour Fund will fall to 2.35 per cent from 2.45 per cent in 2004 and 2.49 per cent in 2003. The current system for disclosing fees to investors is so slow-moving that if you look up CI Harbour today on investing websites like Globefund.com or Morningstar.ca, you'll find the MER from 2003 listed.

CI wants to go a step further in fee disclosure by clearly breaking its MERs into their component parts. The MER is the definitive fee measuring stick, taking almost all costs incurred by a fund and expressing them as a percentage of assets in a fund. With CI Harbour, 2 percentage points of the 2.35 per cent MER cover fund management, 0.20 of a point goes toward administration and operating expenses and 0.15 of a point is GST.

The thinking behind CI's proposals begins with the fact that investors are slowly wising up to the way in which fees eat into their returns. "The trend is growing considerably," Mr. Holland said. "I don't think there's any doubt there's more awareness of fees."

It used to be that the fund industry mainstream ignored the fee issue, instead taking the position that bottom-line performance is what matters. CI believes this approach won't work any more, though.

"Performance is now seen as something out of the control of most people," Mr. Holland said. "The controllable part of business is cost. My sense is that if, indeed, CI is going to be more efficient, we want it put out there and we want people to realize that there are differences."

The true low-cost firms in fund land today are smallish players such as Beutel Goodman, Chou, Mawer, McLean Budden, Phillips, Hager & North and Saxon. The Saxon Stock Fund has an MER of 1.87 per cent, much lower than CI Harbour.

But whereas firms like Saxon cater to savvy do-it-yourselfers, CI and competitors such as AGF, AIM Funds, Franklin Templeton and Mackenzie sell their funds almost exclusively through investment advisers. Adviser-sold funds will always be more expensive to own because their fees include fees and commissions to pay for the advice that clients receive.

Fidelity's MER reductions were a provocative first move in what seems to be a smouldering fund industry fee war, but CI's plan would be more significant if it plays out as Mr. Holland described. CI is an aggressive fund company with some popular products that will only be more appealing if sold with guaranteed low prices.

"Some of our competitors will absolutely hate this," Mr. Holland said. "They're really going to have to look at the cost side of their business. Right now, you don't hear people talk about the cost side of the business because it's not paid for by the owners of the company, it's paid for by the unitholders of the funds."

This message has been repeated, oh, about a million times in this column and by other investor advocates. No one was listening for the longest time, but those days are over.

rcarrick@globeandmail.ca

Lowering fees, raising the bar

CI Fund Management says it will approach securities regulators in the 'next few weeks' over a proposal to cut its fees, lock those fees in and boost their transparency.

2003 HARBOUR FUNDSYNERGY CANADIAN STYLE MANAGEMENT CLASS CI AMERICAN VALUE CI EUROPEAN FUND
Management Fee2.002.002.002.00
Admin/Operating0.330.730.370.43
GST0.160.190.170.17
Total MER2.492.922.542.60
2004
Management Fee2.002.002.002.00
Admin/Operating0.290.410.350.35
GST0.160.170.160.16
Total MER2.452.582.512.51
2005 PROPOSAL
Management Fee2.002.002.002.00
Admin/Operating0.200.200.210.22
GST0.150.150.150.16
Total MER2.352.352.362.38

SOURCE: CI MUTUAL FUNDS

© 2007 The Globe and Mail. All rights reserved.

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