According to an international study analyzing the mutual fund industry in 18 industrialized countries, Canada leads the pack in how much we’re paying for the benefit of mutual fund managers’ investment expertise. Finally, Canadians are on top of something, even if that something is mutual fund fees.
I remember them well from my investment advisor days. Every morning, one of the first things waiting for me on my desk was my commission run from the previous day. It would list every client account that generated commission from securities’ trading. The principle was very simple, the more pages on the commission run, the better.
But there was one other, an equally exciting report called trailing commission. On that report I would see how much each mutual fund company paid me for buying units of its funds on behalf of my clients. Here was another very simple principle at play, the higher the mutual fund fee, the higher the trailing commission for me.
I admit I was as guilty of looking forward to trailing commissions as any other investment advisor in our office; though, I really did my homework before recommending any mutual fund. The usual dance and song ritual from mutual fund salesmen was hardly sufficient for making an educated decision.
At least I was upfront with my clients about how much buying a mutual fund was going to cost them. I always explained what is entailed in management fees, how much I’m making on the deal, what is the difference between front load and back load funds, etc. However, according to the study I mentioned earlier, this is not necessarily the case with the rest of the profession.
Partly helping cloud the issue of mutual fund fees is the fact that individual investors rarely buy funds on their own. More often than not, investors simply go for whatever recommendation comes from their investment advisors, hardly any questions asked. I can tell from personal experience that if I did not explain, of my own volition, how mutual funds work, as well as fees and commissions that go along with them, most clients would not even ask a single question.
I also know that many of my former colleagues simply omitted that conversation, which could mean that the advisory industry is more likely to close ranks with the hands that feed them on a regular basis, so to speak, than with its clients, who may or may not execute a trade in any given month.
But the issue is bigger than who gets paid how much and how often. The simple truth about mutual fund fees is that they erode clients’ profits. It is also true that investment advisors’ duty is to be open about things like that. As an argument of the defense for the advisory profession, I have to mention that we are all immensely proud of our knowledge and expertise, and that we have every right to attach a price tag to it.
By the same token, it is often extremely difficult to talk to clients about fees and commissions. Most of my old clients expected to get the service free of charge. It would usually take some time to build trust and foster their confidence in me. At the end, we would typically arrive to a mutually acceptable agreement.
Going back to mutual fund fees, the advisory industry should have the same kind of client-versus-service-provider talk with the mutual fund industry. Investment advisors should explain to mutual funds that having too high fees does not benefit anyone in the long run. I bet you any money that mutual funds would listen. After all, who else is going to recommend their products to Canadian investors?