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Mutual Fund News

DIY investors can save BIG with discounters

There are no advisers with these mutual fund sellers, but at least you avoid commissions, ROB CARRICK writes

Rule One if you're a do-it-yourself investor who uses mutual funds is to never pay a cent in purchase commissions.

You can manage this if you buy funds from no-load families like those run by the big banks, if you use an on-line broker or if you use one of a growing number of discount mutual fund dealers that serve people who invest strictly in funds and have no interest in stocks, bonds and such.

Discount fund dealers are mostly small independent operations that spend little on advertising, so you may not even know they exist. But these dealers are well worth a look because they offer an opportunity to buy funds from virtually all families on a no-load basis, which means no commissions to buy, sell or switch funds.

No-load fund families like the banks, Phillips Hager & North and Saxon have some excellent products, but you can't always build a solid portfolio from their funds alone. The appeal of a discount fund dealer is that you can cherry-pick the best funds from no-load families like these if you want, and then supplement them with funds from popular load families such as AGF, AIM Funds, CI Funds and Fidelity.

True, you can do this at any on-line brokerage while also having the flexibility to buy other investments as well if you want. The problem is that on-line brokers occasionally have charges that apply to mutual fund buy-and-sell transactions, and they also sometimes penalize small accounts or inactive accounts with small fees.

Something else to consider is that discount fund dealers sell only mutual funds, so the level of service and product knowledge they offer should be strong. At on-line brokers, funds are sometimes treated in a perfunctory way.

On-line brokers provide no advice, which is why they charge so much less than full-service advisers do to trade stocks and funds. Some discount fund dealers are similar in that they exist only to execute your buy and sell requests, but there are several players that provide varying levels of advice or at least guidance in building a portfolio.

In fact, there's some truly original thinking going on in the discount fund sector on delivering investment advice at cut rates. Let's take a look at some of your choices.

Sterling Mutuals

Contact: sterlingmutuals.com/phone 1-800-354-4956

Founded: 1996

Concept: Customers pay nothing to buy funds. Sterling makes its money off of the trailer fees that mutual fund companies embed in their management expenses and then pay to advisers or dealers as compensation for ongoing service to investors. Sterling offers no investment guidance, but it provides some tools to help ensure your mix of funds stays true to your original asset allocation.

Sterling offers access to just about every fund company, including Phillips Hager & North, which pays no trailer fees. Sterling has a rule that no more than 50 per cent of a client portfolio can be in PH&N funds.

Minimum account size: None

Availability: Ontario, Manitoba, Alberta and British Columbia

On-line services: You can check your statement and make trades on Sterling's website.

Mutual Fund Dealers Association of Canada's Investor Protection Corp.: Yes, accounts held at Sterling are covered by this compensation program for people who lose money if their fund dealer goes bust.

ING Direct Funds

Contact: ingdirectfunds.ca/877-464-5678/416-497-6204

Founded: 2003

Concept: This offshoot of the on-line bank ING Direct offers 40 funds from a group of eight fund families, including AGF, AIM-Trimark, CI, Fidelity, Franklin Templeton and Mackenzie. ING collects trailer fees on the funds it offers while charging no fees to buy, sell or switch funds. Among the available funds are such familiar names as Templeton Growth, CI Harbour, Fidelity True North and Trimark Income Growth. ING caters to rookie investors by offering three model portfolios for conservative, moderate and aggressive investors, each built with funds from the same eight fund families. There's also a risk questionnaire to help you decide which portfolio is right.

Minimum account size: None

Availability: Newfoundland, Nova Scotia, Prince Edward Island, New Brunswick, Ontario, Saskatchewan, Alberta, B.C.

On-line services: You can check your account, but trades must be made by phone.

MFDA protection: Yes

Tradex

Contact: tradex.ca/800-567-3863/613-233-3394

Founded: Third-party fund sales began in 1999; Tradex, the mutual fund company, dates back 45 years.

Concept: Tradex operates a small, low-cost, no-load family of funds that are available only to public servants and their families, but it also offers a service for all investors who want to buy third-party funds on a no-load basis. This is a low-tech, no-frills operation, but there's some compensation in the fact that there are no fees even for registered retirement accounts (other dealers may charge as much as $125). Tradex will also absorb any cost involved in switching your RRSP to the company.

Minimum account size: $1,000

Availability: Third-party fund sales available in Ontario and Quebec.

On-line services: None

MFDA protection: Yes

Agora eClient

Contact: agora-eclient.com/866-831-4490/ 416-907-9631

Founded: 2003

Concept: Instead of selling funds at no cost, Agora charges a monthly fee and then hands you back the trailer fees that are part of the management expenses in your funds. Trailer fees on equity funds typically eat up 1 per cent of your returns, while bond funds account for 0.5 per cent. Agora's basic service costs $24.95 a month (there's a $99.95 setup fee and a $9.95 fee for each buy or sell transaction), and the company estimates than you need $50,000 or so to start reaping the benefit of the trailer rebate. The real focus at this dealer, however, is not discounted fund sales but providing advice. There are varying levels of advice, with a top-line service that offers a financial plan, an annual portfolio review and two completed tax returns. The cost is $39.95 a month, plus 0.45 to 0.65 per cent of assets, and Agora says you need $70,000 in your account to make it economical.

Minimum account size: None

Availability: Ontario

On-line services: None

MFDA protection: Indirectly, through the fund dealer the Agora uses.

ASL Direct

Contact: asldirect.com/800-404-4891/416-306-9879

Founded: 2000

Concept: ASL pioneered the idea of charging investors a monthly amount and then rebating them the trailer fees on their funds. The monthly charge is $29.95 -- ASL claims it's tax deductible for non-registered accounts -- and buy, sell and switch transactions cost $9.95 apiece.

ASL rebates trailer fees back to clients each quarter and it claims that investor returns can be as much as 30 per cent higher as these fees compound in their account over the years. As with Agora, there's value in this business model only if you generate more in trailer fee rebates than you pay in monthly fee and trading charges.

Minimum account size: None, but ASL suggests you have at least $30,000 to break even on its monthly fees.

Availability: Ontario, B.C. and Alberta (Quebec and Manitoba may be added later this year)

On-line services: Account access, but no trading.

MFDA protection: Yes

Portfolio4less.com

Contact: portfolio4less.com/866-466-4745/604-257-4745

Founded: 2005

Concept: Portfolio4less differs from the other dealers mentioned here in that it emphasizes a series of fund portfolios it has created with a thoroughness that goes beyond even what some investment advisers provide (you can also choose your own funds if you prefer). Each portfolio includes seven or eight funds from a wide variety of families. You'll find extensive documentation of each portfolio option on the firm's website, including historical performance and a correlation analysis that shows the true extent of the diversification you're getting. Portfolio4less is a no-load fund dealer that makes its living off of trailer fees, and it also offers financial planning services to larger accounts.

Minimum account size: $20,000

Availability: Across Canada

On-line services: Account access and trading

MFDA protection: No

© 2007 The Globe and Mail. All rights reserved.

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