When it comes to fully disclosing advisor compensation, it seems the investment industry has taken one step forward and two steps back.
The step forward was CRM2, a new rule requiring investment advisors to disclose how much they are compensated in dollar amounts compared with the traditional percentage. If you don’t think that’s a big deal, imagine receiving a $5,000 bill every year for the one per cent trailer fee on a $500,000 portfolio to compensate your advisor.
And then there are the two steps backward with the revelation Mackenzie Financial agreed to pay more than a million dollars in penalties for violating mutual fund sales rules by excessively spending on outings and gifts for mutual fund advisors. According to the terms of the Ontario Securities Commission (OSC) settlement, Mackenzie spent excessively on golf outings for advisors and provided them with espresso machines, iPads, and tickets to concerts and sports events.
Expenses like advisor junkets are ultimately paid for by mutual fund investors through an annual fee called the management expense ratio (MER) based on a portion of their investments. The trailer fee is included in the MER but the total fee is not required to be expressed in dollar amounts.
MERs for equity mutual funds under the Mackenzie banner are in line with the rest of the industry and can be as high as 2.5 per cent. In dollar terms, that translates into $12,500 each year on a $500,000 portfolio. That fee gets masked in a percentage figure as do insurance company segregated funds, which impose fees as high as 4 per cent or $20,000 each year on a $500,000 portfolio.
The Canadian Council of Insurance Regulators (CCIR) is pushing for full-dollar disclosure for segregated funds. By 2019, investors in segregated funds will have the entire amount revealed on their statement.
But there’s a bigger issue when it comes to mutual fund company junkets for advisors. Investors have to wonder if their advisors are putting their hard-earned money in a fund because it’s in their best interest, or if it helps their advisors get new espresso machines.
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