There’s a game-changing development this week for discount-brokerage clients who invest in mutual funds. Three additional sponsors — Mackenzie Financial Corp., Invesco Canada Ltd. and BlackRock Asset Management Canada Ltd. — will soon launch Series D funds with much reduced trailer fees.
The first discounter to confirm that it will offer them is RBC Direct Investing, which announced Wednesday that the new Series D funds from the three companies will be available sometime in December, subject to regulatory approval. They’ll join existing Series D offerings that are already on RBC Direct Investing’s product shelf, mostly its proprietary RBC and PH&N funds, along with some third-party funds such as those offered by Beutel Goodman & Co. Ltd. Current investors will be able to switch to the new Series D funds once they’re available.
Currently, the vast majority of fund companies do not provide a low-fee option to self-directed investors. As a result, do-it-yourselfers bear the full burden of trailer fees paid out of the fund management fees, since discounters receive the same compensation from the fund companies as full-service brokers and dealers. In effect, discount-brokerage clients pay for advice that they’re not getting.
Reduced-fee Series D funds address this inequity. Invesco and Mackenzie confirmed that its Series D funds will pay a flat service fee of 0.25% a year for all categories of funds, much lower than their full-service trailers. At this level, discounters like RBC Direct Investing will be compensated for transactions and for ongoing administrative costs.
Series D is available for all Mackenzie funds except for money-market funds, the corporate-class versions of the Symmetry Portfolios, and any funds that have been closed to new investments. Similarly, almost all of Inveco’s funds will be available in Series D, with money-market funds among the few exceptions. BlackRock Canada’s Series D will apply to its new family of seven mutual funds, which went on sale in October.
The savings will be the greatest for the front-end-load option. For example, investors who choose this option for Series A of Mackenzie’s equity funds and nearly all of its balanced funds bear the cost of trailer fees amounting to 1% annually. For fixed-income funds under the same purchase option, the trailer fee for Series D will be slashed in half from the 0.50% payable on Series A.
“We’re not pursuing this as a growth strategy,” Jeff Carney, Mackenzie Investments president and CEO, told Morningstar. “This is an accommodation for investors who have chosen to move to self-directed channels.”
Along with being the top executive at Mackenzie, Carney is also co-president and CEO of IGM Financial Inc., the parent company for both the Mackenzie and Investors Group families of funds. The Investors Group funds are not affected, since they are distributed exclusively through a proprietary sales force that provides advice.
In an interview, Carney emphasized that Mackenzie remains fully committed to serving advisor channels and encouraging Canadian investors to work with advisors. As Mackenzie stated today in a message to advisors posted on its website: “Our primary focus has always been on supporting advice and the advisors who provide this essential service to their clients. We emphatically assert that Canadian investors are best served when they work with a financial advisor.”
Mackenzie’s message to advisors said that by correcting an obvious inequity with Series D, it is demonstrating its ongoing commitment to fair treatment of investors. “We believe that demonstration will carry weight in future discussions with our regulators that affect our industry.”
Invesco Canada president Peter Intraligi said the new Invesco series reflects the company’s belief that investors have a right to decide how they should pay for advice, or not pay for it if they choose to invest on their own. Though Invesco is a strong supporter of advice channels and takes the position that investors achieve better results when working with an advisor, Intraligi said it would be hypocritical to advocate choice for clients of advisors while restricting choice to investors who choose to act on their own.
Intraligi told Morningstar that Invesco began internal discussions that led to the creation of its Series D in December 2012, when the Canadian Securities Administrators (CSA) released its discussion paper on fund fees. Among the possibilities raised in that paper, which prompted numerous submissions by the industry, consumer advocates and other interested parties including Morningstar, was a ban on trailer fees and other compensation paid to brokers and dealers out of the funds’ management fees.
Bans on embedded compensation have been implemented in the United Kingdom and Australia, and fund companies like Invesco and Mackenzie worry that Canadian regulators will follow suit. “The risk of a ban remains,” Intraligi says in a letter being emailed to advisors and posted on Invesco Canada’s advisor website, “so we’ve focused our efforts on defending your right to choose the business model that’s appropriate for you and your clients.”
By creating new fund series that provide a reduced-fee alternative for do-it-yourself investors, companies like Mackenzie and Invesco believe they will be on firmer ground in arguing that investors should have a choice between embedded and non-embedded advisor compensation.
In response to criticism from regulators and consumer advocates that embedded compensation puts brokers and dealers in a conflict of interest to the detriment of their clients, fund companies and the trade group that represents most of them, the Investment Funds Institute of Canada, say the solution is greater transparency. This is in the process of happening, they say, with new fee-disclosure requirements being implemented over the next three years under the regulatory reforms known as Client Relationship Model 2 (CRM 2).