MER , Management Fees , Trailer Fees

[NormR]

I think Money 101 has been badly treated in this thread. Why would anybody bother posting (or asking anything) if the only answer from all the "so called" experts here is going to be "google it" or "if you really dig deep enough you can find it yourself".

Perhaps, but I rather think that another poster would have a much easier time of things.

But don't sit on the sidelines, you can improve matters. Lend a hand and answer Money101's questions.

[NormR]

Lucky you - you don't need to rely on the poor disclosing MRFP for costs (and maybe this is why you weren't aware of its poor disclosure)?

Oh, I've looked at more fund filings than most around these parts. Remember, I was aware of brokerage costs when they were 'hidden' in the footnotes.

But hey, provide the thread a list of your funds and the amounts you have in each. I'm sure that a good Samaritan will take up the cause and provide you a MER & TER fee estimate in both $ and % terms.

[YogiBear]

Costs are listed under a section titled "Ratios and Supplemental Data" in the MRFP. . A client sees this and doesn't recognize them as fees and costs.

Then obviously the client is not reading the whole MRFP, as they should. Under the heading, the "Management Expense Ratio" and "Trading Expense Ratio" figures come with notes explaining precisely what these mean- including the use of ... gasp ... the words "cost" and "expense".

I wish!

For example, see page 3 of this Report, under the heading "Ratios and Supplemental Data"- it's all there just as I said. Your wish has come true!

Now it is up to the investor to actually read it ...

Avoiding the issue is so much more comfortable than addressing it, isn't it?

I couldn't agree more ...

[Bylo Selhi]

see page 3 of this Report, under the heading "Ratios and Supplemental Data"- it's all there just as I said... Now it is up to the investor to actually read it ...

There's some more interesting reading on the previous page in the section titled "Brokerage Arrangements and Soft Dollars." In addition to the soft-dollar disclosure note the discussion of bid/ask spreads.

[Added: This post is'nt directed at Yogi specifically.]

[YogiBear]

see page 3 of this Report ...

There's some more interesting reading on the previous page in the section titled "Brokerage Arrangements and Soft Dollars." In addition to the soft-dollar disclosure note the discussion of bid/ask spreads.

[Added: This post is'nt directed at Yogi specifically.]

For more info on Soft Dollar arrangements, look at the respective Annual Information Forms ("AIF")- for CIBC funds, for example, see pages 46-7 of the 2006 AIF.

As with all documents mentioned here, the AIF is available free for the asking on paper from your fund company, online at your fund company's website or from Sedar, and from your FA (if you have one).

(A further note to CIBC index fund investors- on pages 48-50 of the 2006 AIF are the current rules concerning the management fee rebate for >150K index fund accounts).

[parvus]

money 101 wrote:

(but great writing, though!).

Merci.

You're ignorance is showing.

In which respect? (I'm ignorant about lots of things. ) Still, I assume you to be quite capable of looking after your affairs, so the extra bit of mandated disclosure probably won't make much difference to you, since you know how to find it elsewhere.

To be sure, most retail clients won't know where to look. I'm not sure this little bit of disclosure will be all that helpful to them. Disclosure about the final costs of a mortgage, a recurring credit balance, the agent's take on a DSC mutual fund as well as on the trailer fee or the bank's spread on a GIC might. After wading through that (presuming we're still talking retail here) then MERs and TERs might become relevant.

So Parvus can come on here and act condescending and all knowing and write in nice prose and make assumptions about me, but alas, in the end he did not even address the issue with any meaningful argument or examples,

I don't mean to be condescending (annoyed, frustrated, piqued, maybe...); but, if I came off that way, I apologize. BTW, anyone who can write proper English is my friend. On the other hand, I frankly confess that I don't see much of an issue or an argument here. Either the fundco, or, your FA passes on the relevant info; if they don't, then ask them why they don't. Make them work for your money!

Again, no one can answer my question with a good answer: Why can't the costs be disclosed in an accessible and understandable way along with my rate or return on my statements - instead of in a misleading fashion, as I have illustrated above?

Why don't you design a form and circulate it?

[Bylo Selhi]

OSC wants to know why the industry isn't revealing all [my bold]

In effect since June of 2005, National Instrument 81-106 is aimed at improving the flow of meaningful information from fund company to investor. It means a long list of new obligations for the fund industry, including fund-specific financial statements, detailed management reports of fund performance and proxy voting disclosure. All that data must be processed and made available to unitholders. The OSC has spent the past year reviewing industry compliance and early reviews show that many funds fail to make the grade. In general, fund reports use too much industry jargon and are difficult for the average investor to digest. Some websites are hard to navigate and few fund companies provide a detailed breakdown of management fees...

[YogiBear]

... many [fund executives] question the effectiveness of new regulatory measures, complaining that increased costs will be passed on to the investor and, ultimately, stifle competition by creating barriers to entry for smaller, innovative firms. [emphasis added]

Three points here:

• Will further regulatory-mandated disclosure actually make a difference- the unstated assumption is that more investors will take the time to read, and make the effort to understand, what is being disclosed, and that will in turn improve their investing experience. Is this assumption supported?
  
• For those in the know about the industry- how much are the claimed "increased costs", and how often are these actually "passed on to the investor" through increased expenses charged to funds (vs being absorbed through the management fee as such)?
  
  How can the cost-effectiveness of increased disclosure vs higher fund expenses payable by investors be measured?
  
  Are more knowledgeable investors in the end subsidizing others less aware through higher disclosure costs passed on to funds?
  
• Is it true that higher disclosure costs create "for barriers to entry for smaller, innovative firms"? Is that important (do such firms matter to retail investors), or just a red herring?

[Bylo Selhi]

Will further regulatory-mandated disclosure actually make a difference- the unstated assumption is that more investors will take the time to read, and make the effort to understand, what is being disclosed, and that will in turn improve their investing experience. Is this assumption supported?

Burying it in annual reports, even if written in plain language, probably won't make any difference. That's a bit like the legal tactic of burying a critical memo in boxes and boxes of irrelevant stuff at disclosure of a lawsuit. But putting basic information on a one-page fund fact sheet and/or quarterly statement, might at least result in the asking of legitimate questions by the people who put up all the money and take all the risks in the game.

(One of my pet peeves is that discount brokers, who are legally proscribed from offering advice, continue to receive trailer fees that are supposed to be in respect of advice. Perhaps if each statement said something like "trailer fees paid for onging advice... $183.23" then more than a few clients would start asking some tough questions. (No need to pinch me. I know I'm dreaming in full technicolor.))

Is it true that higher disclosure costs create "for barriers to entry for smaller, innovative firms"? Is that important (do such firms matter to retail investors), or just a red herring?

ISTM that it depends on what's being disclosed. Putting MERs/TERs and dollar amounts in plain view, IRRs using a standard algorithm, some management discussion about fund flows, performance, etc. can't be that expensive. There may be an initial programming cost, but the ongoing costs should be minimal.

[Norbert Schlenker]

Will further regulatory-mandated disclosure actually make a difference- the unstated assumption is that more investors will take the time to read, and make the effort to understand, what is being disclosed, and that will in turn improve their investing experience. Is this assumption supported?

NI 81-106 is nigh on useless because investors will no more read what it mandates than they read a prospectus now.

The only regulation that could make a difference is to force disclosure of both returns versus benchmarks and fees on statements mailed to unitholders. Hit the investor with a 2x4.

"This fund returned x.xx% in the past year, which is y.yy% [more/less] than the benchmark of z.zz%. In the year, you paid total fees of $X,XXX.XX to us to invest in this fund from which we paid your advisor and dealer $Y,YYY.YY."

The now invisible DSC should be included in $Y,YYY.YY IMHO.

[NormR]

• Is it true that higher disclosure costs create "for barriers to entry for smaller, innovative firms"? Is that important (do such firms matter to retail investors), or just a red herring?

Yes. You now need a good deal of seed capital to offer a regular mutual fund. As initial cost go up, the barriers rise. Norbert's dream of running a low cost fund family runs right into these problems.

The Gang of 17

Just how convoluted are the regulations that govern the investment industry? Suppose we used the industry's model to regulate the way we buy and drive cars.

First, force every driver in Canada to get a driver's licence and licence plate for every province and territory, even if they don't live there or own a vehicle there. Then, force them to display all 13 plates on their bumpers. After that, require everyone to pay a fee to another agency to regulate speed. Then, set up another agency to enforce traffic rules. To top it all off, have an Association of Car Dealers decide what reckless driving is. The association should also fine salespeople who harm their clients, but let dealers collude on new vehicle pricing.

Does that sound crazy? It would sound fine to anyone in the securities business. I can't find an industry in any country regulated by more bodies than ours.

I also note that many of the best fund firms are smaller 'boutiques' where investing trumps sales.

[NormR]

"This fund returned x.xx% in the past year, which is y.yy% [more/less] than the benchmark of z.zz%. In the year, you paid total fees of $X,XXX.XX to us to invest in this fund from which we paid your advisor and dealer $Y,YYY.YY."

Let's see,

You want the fund to provide free advertising for one group of competitors (index funds) by comparing the fund's performance on an a after-fee basis to the index on a before-fee basis.

I can also envision a host of poorly selected benchmarks. Comparing say a preferred share fund vs an equity benchmark. Etc.

You also seem keen on implying that the advisor provides no service other than the selection of investments.

I idly wonder if such disclosures might increase performance chasing amongst investors. Increasing the frequency of performance measurement tends to magnify the emotional impact of 'losses' vs gains.

[DanH]

"This fund returned x.xx% in the past year, which is y.yy% [more/less] than the benchmark of z.zz%. In the year, you paid total fees of $X,XXX.XX to us to invest in this fund from which we paid your advisor and dealer $Y,YYY.YY."

Two questions:

1. What do you suggest if a fund has no suitable benchmark? I agree this is open to abuse or at least improper benchmarking.

2. What should fee-based or fee-only advisors do with this disclosure? If they rely only on fund company statements, fee-based advisors will be favoured since their advice fees are taken out of the picture and now the client is left to piece things together on their own.

Also note that fund companies can only CONFIRM fees after an audit. Since fund companies only audit their books once annually, the period for which fee disclosure may apply will not necessarily coincide with the fee-only advisor's statement which is likely based on a calendar year-basis (for tax purposes).

[yielder]

You want the fund to provide free advertising for one group of competitors (index funds) by comparing the fund's performance on an a after-fee basis to the index on a before-fee basis.

You active advisors are afraid to let the light shine on your performance. Since index funds would also have to show their performance and costs against their benchmark, problems with tracking error would pop out quickly.

I can also envision a host of poorly selected benchmarks.

Use the benchmarks specified in the fund prospectus. Sometimes they will be appropriate and sometimes they won't.

You also seem keen on implying that the advisor provides no service other than the selection of investments.

Many do provide service beyond investment selection but the majority don't unless you know something about Bid Bank Advisors, Inc that I don't.

I idly wonder if such disclosures might increase performance chasing amongst investors.

Maybe but surely you aren't suggesting that keeping investors in the dark is in their best interests.

[Bylo Selhi]

You also seem keen on implying that the advisor provides no service other than the selection of investments.

The "we paid your advisor and dealer $Y,YYY.YY" is a statement of fact. Are you implying that the client is incapable of assessing if "the advisor provides no service other than the selection of investments" and if that service is worth $Y,YYY.YY?

2. What should fee-based or fee-only advisors do with this disclosure?

Factor the numbers into their invoices

[NormR]

You want the fund to provide free advertising for one group of competitors (index funds) by comparing the fund's performance on an a after-fee basis to the index on a before-fee basis.

You active advisors are afraid to let the light shine on your performance. Since index funds would also have to show their performance and costs against their benchmark, problems with tracking error would pop out quickly.

Ah but who do the active funds have turn to when buying index data? Not only do they have to advertise for their competition but they have to pay them for the privilege.

Use the benchmarks specified in the fund prospectus. Sometimes they will be appropriate and sometimes they won't.

Ah, a benchmark = holding cash would be good then? Sort of like the present situation.

Maybe but surely you aren't suggesting that keeping investors in the dark is in their best interests.

Ah, but maybe being kept in the dark - to the extent that high frequency performance numbers aren't shoved down their throat - is in their best interest.

The "we paid your advisor and dealer $Y,YYY.YY" is a statement of fact. Are you implying that the client is incapable of assessing if "the advisor provides no service other than the selection of investments" and if that service is worth $Y,YYY.YY?

Ah, but the implication of the full quote is that your advisor is paid X and has provided Y in returns.

[yielder]

Ah but who do the active funds have turn to when buying index data? Not only do they have to advertise for their competition but they have to pay them for the privilege.

So you're saying that everytime that any actively managed fund says that its return is x and its benchmark's return is y, that the fund must pay the benchmark company? Where can I buy shares in S&P, Mergents, etc. because they guys have the Golden Goose?

Ah, a benchmark = holding cash would be good then? Sort of like the present situation.

Who said anything about good or bad? All that I was doing was acknowledging the problems of benchmarks. Are you saying that because of the problems of benchmarking that mutual funds, active & indexed, should not be measured against them and that the measurement should not be published?

Ah, but maybe being kept in the dark - to the extent that high frequency performance numbers aren't shoved down their throat - is in their best interest.

What's high frequency? One year, two year, three year numbers. Fundco's should not be reporting performance on any smaller frequency.

Lots of negativity from you, Norm, to suggestions for improved reporting. You always talk about cost and I usually agree with you. But I know that the info that's being asked for is readily available to fundco's. Fundco management looks at it on a regular basis to assess how managers are doing and what they are doing. Including this info in paper reports to investors is expensive which is why fundco's are increasingly going to opt-in reporting. However, making the info readily and easily available at the fundco site combined with opt-in reporting will, at least, present the possibility of a decline in printing costs. But you don't even see that as a solution. Info? Let 'em go to Sedar. Is it any wonder that advisors get bashed? And I happen to believe that 99% of people should be using advisors.

[NormR]

Ah but who do the active funds have turn to when buying index data? Not only do they have to advertise for their competition but they have to pay them for the privilege.

So you're saying that everytime that any actively managed fund says that its return is x and its benchmark's return is y, that the fund must pay the benchmark company? Where can I buy shares in S&P, Mergents, etc. because they guys have the Golden Goose?

S&P is a McGraw-Hill Company which is listed as MHP on the NYSE.

Ah, a benchmark = holding cash would be good then? Sort of like the present situation.

Who said anything about good or bad? All that I was doing was acknowledging the problems of benchmarks. Are you saying that because of the problems of benchmarking that mutual funds, active & indexed, should not be measured against them and that the measurement should not be published?

Now now, there is a difference between government demanding that a benchmark be used and a fund company using one.

In some cases no benchmark would be better than a bad but mandated benchmark.

Ah, but maybe being kept in the dark - to the extent that high frequency performance numbers aren't shoved down their throat - is in their best interest.

What's high frequency? One year, two year, three year numbers. Fundco's should not be reporting performance on any smaller frequency.

I think that people were looking for such calculations on their monthly statements.

You're over reaching, I made the comment in reference to the benchmarked numbers and not on fund performace istelf.

Lots of negativity from you, Norm, to suggestions for improved reporting. You always talk about cost and I usually agree with you. But I know that the info that's being asked for is readily available to fundco's. Fundco management looks at it on a regular basis to assess how managers are doing and what they are doing. Including this info in paper reports to investors is expensive which is why fundco's are increasingly going to opt-in reporting.

Note, opt-in != government mandated.

However, making the info readily and easily available at the fundco site combined with opt-in reporting will, at least, present the possibility of a decline in printing costs. But you don't even see that as a solution. Info? Let 'em go to Sedar.

You are mischaracterizing my views.

Is it any wonder that advisors get bashed? And I happen to believe that 99% of people should be using advisors.

For good or ill, there is a very heavy anti-advisor tilt on this board. I don't mind arguing for an unpopular view. It should let both sides sharpen their arguments and explore different aspects on an issue. But I'm not here to defend all advisors either.

[Bylo Selhi]

S&P is a McGraw-Hill Company which is listed as MHP on the NYSE.

Wonderful. But you still haven't answered Yielder's question. Are you also suggesting that every newspaper and website that reports index returns in its financial news section owes MHP a tribute?

Ah, but the implication of the full quote is that your advisor is paid X and has provided Y in returns.

Well I didn't make that inference. But if you did then why not suggest an alternate wording that you believe is clearer.

I think that people were looking for such calculations on their monthly statements.

Again, your inference seems at odds with what people actually wrote. But in any case, do advisor-led investors get monthly statements? (AFAIK the norm is quarterly unless it's a brokerage account and there's been trading activity in the previous month.)

[NormR]

Ok guys, sorry to spoil your party. Continue on.

[Bylo Selhi]

Ok guys, sorry to spoil your party. Continue on.

So what happened to the...

I don't mind arguing for an unpopular view. It should let both sides sharpen their arguments and explore different aspects on an issue.

[NormR]

Ok guys, sorry to spoil your party. Continue on.

So what happened to the...

I don't mind arguing for an unpopular view. It should let both sides sharpen their arguments and explore different aspects on an issue.

Shurg I have a limit, and I don't want to piss everyone off around here.

[yielder]

Now now, there is a difference between government demanding that a benchmark be used and a fund company using one.

Yep and it wouldn't exist if fundco's used benchmarks properly, where properly is to benefit the owners of the fund. Owner=shareholder not fundco.

In some cases no benchmark would be better than a bad but mandated benchmark.

Absolutely but that's no argument for not requiring a benchmark. It's an argument for getting the fundco to use a "good" benchmark.

I think that people were looking for such calculations on their monthly statements.

Then people need to have it explained to them why one-month, three-month, and YTD returns are useless and even potentially damaging to them. I see no problem with giving them a rolling 12 month return and 3, 5, and 10 year returns plus return variability for each period alongside the relevant benchmark measures for the same periods. In fact, mandating (which you don't like) nothing less than a rolling 12 month return would get fundco's to focus on the longer term.

You're over reaching, I made the comment in reference to the benchmarked numbers and not on fund performace istelf.

One without the other is not much help.

Note, opt-in != government mandated.

Sorry, I don't follow.

You are mischaracterizing my views.

I know I am but your [s]contrarian[/s] curmudgeon gene seems to be in the way of providing constructive improvement to investor reporting.

For good or ill, there is a very heavy anti-advisor tilt on this board.

Yep. That's one of the "problems" that goes with DIY.

I don't mind arguing for an unpopular view. It should let both sides sharpen their arguments and explore different aspects on an issue.

It should but it doesn't. People who are pre-disposed, for whatever reason, to be anti-advisor will only see a questionable view as confirming their beliefs.

In all the time that I've been pounding away at the need for engagement letters, compensation sources & investment policy statements, I can't recall advisors generally being in agreement. What I do recall is advisors saying that investors will sign anything and then still hold us accountable for poor performance.

Similarily, in this thread, when I pointed out a couple of very investor friendly fundco sites, no advisors commented at all. Dan was helpful in pointing out an excellent Cdn fundco site.

Added: I'm not pissed off at you but rather disappointed. You have a wealth of knowledge that could be used to building better, possibly cheaper, investor reporting.

[YogiBear]

Geez guys, I hate to break up your fun, but if a relative newbie can make a point-

• Will further regulatory-mandated disclosure actually make a difference- the unstated assumption is that more investors will take the time to read, and make the effort to understand, what is being disclosed, and that will in turn improve their investing experience. Is this assumption supported?
  
• [snip]
  
• Is it true that higher disclosure costs create "for barriers to entry for smaller, innovative firms"? Is that important (do such firms matter to retail investors), or just a red herring?

NormR answered the second question about barriers to entry in the affirmative, and suggested that it does matter. But WADR, your debate on further/ better disclosure has veered off into the the "hows"- while continuing to assume that better disclosure will actually make a difference to investor behaviour. But will it?

Shouldn't that question be addressed before planning whether- and how- to commit time and resources to carrying it out? Are there studies concerning Canadian investor behaviour and types of disclosure- or anything that could be used as a proxy for disclosure? What if we are all assuming that poor disclosure makes a difference- when it turns out that other factors are much more important to most investors? XSC regulators have notoriously limited resources- would these be better employed improving other aspects of the investor experience? Or is better disclosure the retail investor holy grail (no sarcasm intended- if it helps that much, I'm all for it).

[Bylo Selhi]

WADR, your debate on further/ better disclosure has veered off into the the "hows"- while continuing to assume that better disclosure will actually make a difference to investor behaviour. But will it?

I think the two are related. Burying disclosure about abstract things like TERs in annual reports probably won't affect investor behaviour because few investors (or their advisors) will ever read it or identify with it. But perhaps if such information was "in their face" and in a format they could easily identify with then it might make a difference to investors. That's what putting critical information like MERs/TERs, commissions and trailers, in dollar amounts on their statements might accomplish.

Shouldn't that question be addressed before planning whether- and how- to commit time and resources to carrying it out? Are there studies concerning Canadian investor behaviour and types of disclosure- or anything that could be used as a proxy for disclosure?

I'm not aware of such studies that are on-point. I don't know how good a proxy this is (and I don't really want to digress to an anti-smoking debate...) but for instance "in your face" warnings on cigarette packages do have positive effects on smoker behaviour. And that's for something that's powerfully addictive.

(See e.g. Impact of the graphic Canadian warning labels on adult smoking behaviour: "Graphic cigarette warning labels serve as an effective population based smoking cessation intervention. The findings add to the growing literature on health warnings and provide strong support for the effectiveness of Canada’s tobacco labelling policy." as well as a long list of that "growing literature": Picture based Cigarette Health Warnings.)