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It's about time: Do-it-yourselfers to pay less for advice-free mutual funds

Finally, some progress in ending the mutual fund industry's abusive discrimination against do-it-yourself investors.

RBC Direct Investing, the discount brokerage arm of Royal Bank of Canada, said yesterday that its clients will soon be able to buy low-fee versions of 42 existing funds in the in-house RBC fund family. The fees will be lower for these new series D funds because investors won't have to pay for financial advice they're not receiving. The only drawback - you have to invest a minimum of $10,000.

For ages, the fund industry has had a neat little scam going where it builds the cost of advice into the cost of owning its products, regardless of whether a client buys the fund from an adviser or through a discount broker. Discounters, of course, are order takers who provide no advice.

Fund fees that cover the cost of advice are called trailing commissions and they can account for as much as 0.50 to 1.15 percentage points of the management expense ratio of an RBC equity or balanced fund. If you're not getting advice, this is money wasted.

When they become available in early July, RBC's new D-series funds will have MERs that include trailers of no more than 0.25 of a point. By paying less in fees for their funds, RBC Direct Investing clients will stand to make substantially higher returns.

Let's say you're a self-directed investor who wants a quick and easy way to get some exposure to blue-chip dividend stocks. RBC Canadian Dividend is a legitimate choice that would have an MER of 1.73 per cent if you bought it from an RBC branch or through RBC Direct Investing. When the series-D version becomes available, the MER for this fund would drop to an estimated 1.23 per cent.

If you invested $10,000 in this fund for 10 years, the lower MER of the D fund could boost your returns by $1,155, assuming a 10-per-cent return versus a 9.5-per-cent gain for the regular version of the fund. That's like a 4.7-per-cent bonus on your returns.

RBC's D funds will do much the same thing as the 12 E-series index funds that TD Asset Management has for years offered to self-directed investors willing to buy online through TD or the discount broker TD Waterhouse. The series has had limited success, however, and TD doesn't plan to make additional funds available.

At RBC Direct Investing, the thinking is that cheaper funds will prompt clients to bring more money to the firm. "Clients have probably wanted to look at funds, but they've been deterred by costs," said Doug Coulter, president and CEO. "Traditionally, funds are priced for the advisory channel. So we said, there's a whole component of advice that we're not giving. We then asked ourselves, should we be receiving [trailers], should the client be compensated for doing the research and making the decision? That was the genesis of this decision."

The fact that RBC Direct provides zero advice suggests trailers should be eliminated altogether for self-directed investors. But Mr. Coulter said a small trailer is required to cover various costs. A trailer of 0.1 per cent seems about right for a discount broker and, while we're criticizing, it would be nice if RBC made its D funds available through other discount dealers. That said, it's hard to complain about RBC's way of doing things because it's such a departure from the rip-off status quo.

RBC's announcement adds some momentum to a slight but increasingly noticeable fund industry trend toward more competitive pricing. Earlier this week, The AIM-Trimark family announced an MER reduction of 0.25 of a point in a few of its non-core funds. Yesterday, a new, low-fee fund company headed by former Phillips Hager & North chief Tom Bradley opened its doors officially. Steadyhand Investment Funds will have MERs ranging from 0.65 to 1.7 per cent, which is reasonable.

Just a few weeks ago, PH&N announced a new pricing plan that clearly delineates the fees clients pay if they invest for themselves or use an adviser. You get rock-bottom MERs with PH&N if you call your own shots, or you can pay as much as an extra 0.50 of a point in MERs to cover trailers paid to your adviser.

This arrangement is transparent, fair and, apparently, poisonous to the vast majority of fund companies. These firms rely on investment advisers to sell their products, and they're afraid to offend the sales force by offering cheap funds to do-it-yourselfers.

By contrast, RBC sees an opportunity in serving the self-directed investor. In fact, Mr. Coulter said the firm will talk to third-party firms about developing their own version of the D series fund. "It's going to be interesting," he said. "This is a competitive marketplace."

In addition to its D series of funds, RBC Asset Management also plans to introduce a trio of socially responsible mutual funds in early July. Michael Jantzi, a specialist in socially responsible investing, will help run a Canadian equity, global equity and balanced fund for RBC. Mr. Jantzi is also advising Barclays Global Investors, which recently introduced a TSX-listed exchange-traded fund called the iShares CDN Jantzi Social Index Fund.

rcarrick@globeandmail.com

DO IT YOURSELF AND SAVE

Discount broker RBC Direct Investing will introduce a low-fee version of 42 funds in the RBC fund family in early July. The new D-series funds will cost less because they include a reduced trailer fee, which compensates the seller of a fund for ongoing client service. Here's how the trailing commissions for D series funds compare with existing RBC funds.

Fund type Existing trailing commissions Trailing commissions for the new D series
Money Marketup to 0.25%up to 0.10%
Incomeup to 0.80%up to 0.15%
Balancedup to 1%up to 0.25%
Equityup to 1.15%up to 0.25%

SOURCE: RBC ASSET MANAGEMENT

© 2007 The Globe and Mail. All rights reserved.

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