In Canada, mutual funds are the largest held embedded fee investment product available. They are categorized by a class system, of which most investors are familiar with the A-Class fund predominately used by financial advisors or mutual fund representatives.
Hidden Fees in A-Class Mutual Funds
The A-Class fund can generate the highest possible commissions. In Canada, the average management expense ratio for an A-Class mutual fund – which is the cost of owning the fund – is 2.53%:
- 1.00% is given to the advisor to service the client on an annual basis and to ensure they stay invested (known as the trailer fee).
- 1.53% is given to the mutual fund company executing the investment mandate and therefore the performance of the fund.
- Commissioned advisors could also receive a 5% commission bonus behind the scenes for selling Deferred Service Charge Funds or up to 3% for selling Low Load Funds, which lock up the investor for an extended period of time.
However, as of December 31st, 2015, the A-Class mutual fund is under serious examination.
Regulators are forcing the disclosure of the 1.00% trailer given to advisors and exposing commission bonuses. Unfortunately, the 1.53% component of the MER (Management Expense Ratio) will not be found in the report.
Therefore, enter F-Class Funds.
Are F-Class Mutual Funds the Answer?
This class of mutual funds pay no sales commissions, trailer fees, or other compensation to the advisor.
So are F-Class funds a trick? Or are they actually a treat?
At HighView, we take great pride in facilitating dialogue in the management of wealth. We ask that you use caution if you’re being promoted fee-based accounts or F-Class funds from mutual fund representatives or financial advisors.
Regrettably, and as illustrated, something that could be a treat for a cost conscious investor can be turned in to a trick.
We encourage you to watch the video above, where we break down how F-Class funds can still have hidden fees investors don’t know about: