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Advisers talk tough on fund fees

The car industry is in trouble, so it's cutting prices. The mutual fund industry's having a bad time lately, so it's...

Just recently, the people at the financial advice firm Assante Wealth Management tried to get an answer to this question. They spoke to the mutual fund companies they deal with most and asked what's happening with fees in 2009.

"We thought it was prudent to ask the question - 'What are you going to do, and are clients going to be hurt by it?'" said Joe Canavan, chairman and CEO at Assante. "The responses [from the fund companies] have been very, very weak."

The mutual fund industry is not fighting for survival like the North American auto makers are, but these are trying times, nonetheless. Total fund industry assets at the end of last month totalled $491-billion, down 27 per cent from $672-billion a year earlier.

Fund companies make their money by charging fees that are pegged as a percentage of the money they manage. If they have less money to manage, and obviously they do, then revenues fall unless fees are increased. This is Assante's concern.

"We don't want to get blindsided by some of these fund companies that are looking for ways to boost earnings on the backs of our clients and our advisers," Mr. Canavan said.

He divides the fund industry into three groups when it comes to fees, one of which is made up of companies that have locked in their charges and thus aren't in a position to pass through any increases. Among the companies to have done this is CI Investments, which is part of the same corporate family as Assante, as well as Investors Group, Mackenzie Financial, RBC Asset Management and TD Asset Management.

Another group of fund companies have fixed their fees, but retain the ability to raise them if assets fall below certain levels. The third group has a discretionary fee cap, which clearly leaves room for them to make customers pay more.

Mr. Canavan estimates that 50 to 70 per cent of the fund companies his firm has spoken to fall into the latter two groups, which means there's the potential for fees to rise.

Investment advisers are the biggest sellers of mutual funds in Canada, but they've never been the force they could be for influencing the fund industries on the matter of fees. Today, in bear market conditions that just won't quit, things are changing.

Mr. Canavan said Assante's advisers are going to be informed about the positions that various fund companies are taking on fees for the year ahead, and he said his firm is looking at incorporating this information into a rating system it uses for funds.

The message for fund companies that plan to raise fees: "We want to know with some certainty that companies are not going to jam the client."

The biggest concern for Mr. Canavan right now is money market funds, where the average management expense ratio (MER) is 1.03 per cent. MERs are the definitive gauge of fund fees - they measure almost all costs of owning a fund as a percentage of assets.

The issue right now with money market funds is that low interest rates have at the moment squeezed returns to below 1 per cent on an estimated annualized basis. Net result: Fees can be significantly higher than returns. If rates keep falling, and they may have to if the economy doesn't stabilize, then returns could conceivably fall to zero and then into negative territory.

If that were to happen, then fund companies would have to lower their fees if they wanted to maintain the $10 value that money market funds are set at (the funds pay out their gains as interest).

Investors won't know if fund MERs are rising until after the fact because companies only have to disclose fee changes in periodically issued regulatory documents. As for Assante, it's asking for commitments right now.

"We want clarity," Mr. Canavan said. "We want to know with certainty that, if we're going to be in business with a company, this is how we will be treated."

You can tell the influence that individual investors have had on fees over the years by the fact that funds in Canada are expensive by global standards. Now, let's see what happens when a big financial advice company gets tough on fees.

rcarrick@globeandmail.com

***

Fees v. returns in money market funds

Here's how management expense ratios for the seven of the largest money market funds compare with estimated returns for the next 12 months:

FundMER (%)Yield (%)*
RBC Canadian Money Market0.891.64
CIBC Money Market1.130.54
TD Canadian Money Market0.920.7
Scotia Money Market1.140.91
RBC Canadian T-Bill0.890.56
CI Money Market1.050.3
Renaissance Money Market1.080.68

*current yield is an estimated annualized return based on recent

results; Note: this list excludes low-fee premium money market funds for high net worth investors

Source: Globefund.com

© 2007 The Globe and Mail. All rights reserved.

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