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Some of the biggest fund firms plan to give investors a break

CI, Mackenzie expected to lower fees

A fee-cutting revolution has broken out in the mutual fund industry.

CI Mutual Funds, the country's third-largest fund company, said yesterday that it will ask its clients to vote on a proposal that will cut fund ownership fees across the board, then lock them in as of the beginning of September.

Commenting on the move, the head of rival Mackenzie Financial Services said his firm is also working on fee reductions.

"We've made a little headway on fees and you're going to see more headway from us," David Feather said.

After years of complacency on the matter of fees, the fund industry has recently shown signs that it's ready to make changes. Fidelity Investments Canada cut the ownership fees on some of its funds early in 2005, and now CI is making cuts that will be fixed so they can't increase in years to come.

"This proposal really will add the certainty that is sorely lacking in what it costs to have your savings managed," said Bill Holland, chief executive officer at CI Fund Management Inc., parent of CI Funds.

To be fair to the fund industry, a minority of companies have gradually lowered the management expense ratios on their funds in the past few ears, notably AIM Funds Management Inc. and RBC Funds Inc.

Yet these changes are difficult for investors to pick up on because of the practice in the fund industry of reporting fees that are one or more years out of date. CI's locked-in fees will be posted in the simplified prospectus, which is the definitive information source when buying funds.

While some fund industry executives said CI's plan to cut MERs is good news for investors, at least one firm showed some ambivalence about the plan to lock in fees.

Dwayne Dreger, AIM's vice-president of communications, questioned what will happen to CI's locked-in fees if the company is able to lower its operating costs.

"As CI is able to find more efficiencies in its lineup, I don't know if there's the ability for those to be passed on to unitholders," he said.

Mr. Dreger said AIM prefers the approach of leaving fees to float freely because it gives the company room to continually pass on savings to unitholders. "If there's a way to accelerate the reporting of fees at the end of the year, that's great. But I'm not sure how much quicker that kind of reporting can actually be done."

CI's Mr. Holland said competition from other fund companies could drive down CI's fees in the future, but he stressed that fees will never rise.

Ken Kivenko, an investor advocate with a special interest in funds, said he wants to be cautious in supporting CI's move until he sees the details. "It sounds like it's a step in the right direction," he said. "It's a recognition that consumers need a little help."

CI will cut a component of its fees that covers administration costs by an average of 36 per cent. Here's an example of how it would work: Synergy Canadian Class, a Canadian equity fund, would have a locked-in management fee of 2 per cent of assets and charge another 0.2 per cent to cover administration fees. Add GST and other taxes and you have an MER of 2.36 per cent, which is the same as saying that all fees together are equal to 2.36 per cent of the assets in the fund. The fund's MER was 2.50 per cent in 2004.

CI customers still won't have a complete picture of how much they're paying for their funds because brokerage commissions incurred by fund managers are not included in the company's MERs, as per industry practice.

Lowering fees will reduce revenue for CI, but Mr. Holland said he expects the results to eventually be positive for the company.

"This business is about packaging and a big part of packaging is pricing," he said. "We believe that over time, this will give us more business."

Mike Morrow, an investment adviser in Thunder Bay, Ont., said he uses Mackenzie and AIM Trimark funds more than CI and isn't sure if he'll change that as a result of the company's pricing changes. Still, he likes the idea of greater fee clarity.

"I'm not a big CI guy, but I would absolutely love it if AIM and Mackenzie did the same thing," Mr. Morrow said.

Mr. Holland said CI's pricing will also highlight the major effect that GST has on fund MERs. CI says the tax costs its clients about $70-million, which is equal to about 80 per cent of the total operating cost of CI funds. "Honestly, this should incite riots," Mr. Holland said.

A not-so-modest proposal

CI Fund Management CEO Bill Holland says the company's mutual fund clients will be asked to vote on a proposal that will cut ownership fees by an average 36 per cent and then lock in these fees as of the beginning of September. He stressed that the fees would never rise.


20032004Proposal 2005
Management fee2.00%2.00%2.00%
Administrative fee0.330.290.20
GST & other taxes0.160.160.15
TOTAL MER2.492.452.35


20032004Proposal 2005
Management fee2.00%2.00%2.00%
Administrative fee0.730.410.20
GST & other taxes0.190.170.15
TOTAL MER2.922.582.35


20032004Proposal 2005
Management fee2.00%2.00%2.00%
Administrative fee0.370.350.21
GST & other taxes0.170.160.15
TOTAL MER2.542.512.36


© 2007 The Globe and Mail. All rights reserved.

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