Forcing funds to highlight out-of-the-ordinary MERS could be good for both advisor and client
Industry statistics indicate that only 10% of the approximately 2,700 mutual funds in this country pay trailer fees of more than 1% leading some to suggest MER guidelines are a better solution for solving exorbitant fees.
“Further to the idea of putting a cap on management fees, I think that I would prefer that someone set out fee guidelines for various types of funds instead of rules,” Toronto advisor Mark Matsumoto told WP while discussing an alternative to capping trailers. “A rule might require a fund to disclose if their fees are above guidelines on client statements. This would not force high cost operations out of business, but would motivate them to become more efficient or to explain themselves.”
In the example from yesterday’s story about the 1.75% trailer, a guideline could be implemented that requires dealers to indicate on client statements when those clients own funds with MERs higher than 2.5%. It wouldn’t be against the rules to hold these funds but it might shame advisors, dealers and fund companies to push fees lower.
CRM3, anyone?
While this argument has definite merit it shouldn’t mean for a second that the fund companies are off the hook simply by dropping management fees below a suggested, but not required, 2.5% ceiling.
That’s because there’s still the issue of trailer fees.
As the Cummings Report pointed out, higher trailers leads to higher fund flows regardless of past performance. Under these fund guidelines a fund could have a 2.5% MER with a trailer of 1.75% without having to disclose anything to the client beyond CRM2 – a loss leader if you will.
“Personally, I would avoid such high trailer funds simply due to the fact I don’t want to be in a conflict with my client,” a veteran west coast advisor told WP. “If other advisors did that as well, then the fund company’s sales would suffer (thereby shooting itself in the foot) which is likely the opposite of what they [fund company] expected to happen by offering such a high trailer in the first place. Frankly I am insulted a fund company would think that advisors could be so easily bought.”
Capped trailers or MERs or both? Advisors have your say.
“Further to the idea of putting a cap on management fees, I think that I would prefer that someone set out fee guidelines for various types of funds instead of rules,” Toronto advisor Mark Matsumoto told WP while discussing an alternative to capping trailers. “A rule might require a fund to disclose if their fees are above guidelines on client statements. This would not force high cost operations out of business, but would motivate them to become more efficient or to explain themselves.”
In the example from yesterday’s story about the 1.75% trailer, a guideline could be implemented that requires dealers to indicate on client statements when those clients own funds with MERs higher than 2.5%. It wouldn’t be against the rules to hold these funds but it might shame advisors, dealers and fund companies to push fees lower.
CRM3, anyone?
While this argument has definite merit it shouldn’t mean for a second that the fund companies are off the hook simply by dropping management fees below a suggested, but not required, 2.5% ceiling.
That’s because there’s still the issue of trailer fees.
As the Cummings Report pointed out, higher trailers leads to higher fund flows regardless of past performance. Under these fund guidelines a fund could have a 2.5% MER with a trailer of 1.75% without having to disclose anything to the client beyond CRM2 – a loss leader if you will.
“Personally, I would avoid such high trailer funds simply due to the fact I don’t want to be in a conflict with my client,” a veteran west coast advisor told WP. “If other advisors did that as well, then the fund company’s sales would suffer (thereby shooting itself in the foot) which is likely the opposite of what they [fund company] expected to happen by offering such a high trailer in the first place. Frankly I am insulted a fund company would think that advisors could be so easily bought.”
Capped trailers or MERs or both? Advisors have your say.
