New disclosure rules on investment fees may make it difficult to compare costs among financial advisers.anyaberkut/Getty Images/iStockphoto
It is a common investor misconception that a mutual fund with $1-billion in assets and management fees of 2.25 per cent makes an annual profit anywhere near $22.5-million for the mutual fund company.
Any discussion of mutual fund fees must begin by separating the interests of the mutual fund company itself from the brokers and financial planners that sell the fund products to their clients. Most importantly, if our hypothetical $1-billion fund pays a one per cent trailer fee to financial advisers, that large sum of money -- $10-million per year -- is an expense for the mutual fund company.
Things have calmed down a lot since the mutual fund industry heydays in the late 1990s, but fund companies also spend exorbitant sums wining and dining and hockeygaming the advisers who sell their funds. This is also charged to investors through higher management fees.
New regulations on various boondoggles and gifts were entirely necessary because things got really excessive. I attended a fund company-sponsored golf tournament in the previous big spending era when a broker told his fund representative, with a direct look, that they'd forgotten their golf shoes. The rep dutifully went into the pro shop and bought them a new pair. I could easily collect hundreds of stories like this.
The banning of trailer fees would mean that our hypothetical fund could drop its management fee by one per cent to 1.25 per cent – they'd no longer have to pay advisers to hold their funds. You'd think this would make them happy, but it's not that simple. The people that previously sold their funds to clients would no longer have a financial incentive to do so. Fund sales would drop and this hurts the fund company bottom line.
The biggest losers from a trailer fee ban would be the advisers selling mutual funds and the big winners would be the banks. The former case is obvious – no trailer fees would cripple the income for advisers with fund-intensive businesses. Independent mutual fund companies would also suffer from slower sales and higher redemptions.
The bank-owned fund companies win because they already have the infrastructure to distribute their products to existing banking clients without paying advisers, and market share for bank mutual funds will grow at an even more rapid pace in the post-trailer period.
For investors following the debate, it will be important to remember that the term 'mutual fund industry' includes the asset management firms themselves but also the tens of thousands of advisers whose livelihoods depend on commissions generated by selling funds to clients and having these clients hold them for long periods. The interests of these groups do not always align – fund companies are generally happy about the curbing of marketing excesses to spoil brokers and financial planners, but aren't about to say that publicly because it would alienate the distribution networks they depend on.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Freshii Inc. The problem with gobbling up Freshii Inc. stock is that a few months later you're hungry for answers. How is it that a tiny fast-food chain specializing in healthy meals can go public at the end of January, raise $125-million from investors based on its projections of warp-speed growth, earn near-universal applause from analysts – and then abruptly scale back its growth projections in September, chopping its share price and costing initial buyers a bundle? Ian McGugan takes a look at what's happened.
Bombardier Inc. Beleaguered Bombardier Inc. investors are being tested again. Following a preliminary ruling from the U.S. Commerce Department on Tuesday night, Bombardier now faces punitive countervailing duties on planes imported into the United States. The shares fell right on cue. But for investors who don't mind taking a risk with an unpopular bet, there appears to be a good reason to side with Bombardier here: Its new C Series planes, apparently, are being noticed. David Berman explains the investment case.
Hardwoods Distribution Inc. This stock appeared on the positive breakouts list earlier this week as its share price climbed to a record high. The stock has been in a long-term uptrend, steadily growing its earnings to record levels through a combination of organic, or internal, growth and acquisition growth. The share price has increased 300 per cent over the past five years. A $10,000 investment made five years ago, not including dividends, would be valued at over $40,000 today. The company's earnings growth appears to be intact, supporting further stock price appreciation. The company is covered by five analysts, and all five analysts have buy recommendations. Furthermore, management has announced a dividend increase every year since 2012 and has a conservative payout ratio to continue to increase its quarterly dividend. Jennifer Dowty explains.
Harley-Davidson Inc. The Contra Guys like motorcycles but they're not so hot on Harley-Davidson stock, which has started to experience something akin to a flat tire. This month, two of its unions said sayonara to their agreements, sales have skidded, as has the stock's price, and its debt load has ballooned. After careful analysis and consideration, the Contra Guys say they are not bullish on this HOG. Although an out-of-favour company, it does not meet their contrarian criteria as a good investment. But while they suspect that in the short term the stock price will tumble, having to cover the dividend is a primary reason to scare shorts away.
The Rundown
How the Fed is clipping the loonie's wings
Federal Reserve chair Janet Yellen reiterated the central bank's intentions to continue raising interest rates, sending U.S. bond yields higher and the loonie skidding lower. Ms. Yellen noted Tuesday that the Federal Reserve "should ... be wary of moving too gradually" in hiking interest rates, during a speech to the National Association for Business Economics. The comments were the latest in a series of warnings to bond markets that, like the Bank of Canada, the central bank would continue to raise policy rates despite weak inflation. Scott Barlow looks at two charts that indicate how the Fed directly affects Canadian investors through the value of the loonie.
Metro's plan to buy Jean Coutu is a hidden risk for Couche-Tard investors
If Metro Inc. proceeds with its plan to buy Jean Coutu Group PJC Inc. for $4.5-billion, investors are going to be left wondering what to make of a third company, Alimentation Couche-Tard Inc. The three companies share more than a home base in Quebec and a business model that rests on happy consumers. Metro, a national grocer, owns a significant ownership stake in Couche-Tard, an international chain of convenience stores. For Metro to buy Jean Coutu, a pharmacy chain, it may relinquish its stake in Couche-Tard – currently valued at about $1.9-billion – raising the question of whether investors should follow Metro's lead out of the convenience-store business. They probably should. David Berman explains.
John Heinzl's new dividend growth portfolio: build long-term wealth – with less risk
Goodbye, Strategy Lab. Hello, Yield Hog dividend growth portfolio. In case you missed the announcement, The Globe and Mail's Strategy Lab series has come to a close after five years. John Heinzl says he's pleased that his Strategy Lab model dividend portfolio – which focused on blue-chip stocks that raise their dividends regularly – posted an annualized return of 11.6 per cent, beating the S&P/TSX composite index's annualized return of 7.2 per cent over the same period. (Both figures are total returns that include capital gains and dividends). Next week, in response to popular demand, he'll be launching the Yield Hog dividend growth portfolio.
Canada's fund industry is not giving up on trailer fees without a fight
After Douglas Cumming wrote a report critical of Canadian mutual-fund fees, he was summoned to meet with the head of a large fund company in Toronto. The chief executive opened the conversation with a morbid prediction. "On your gravestone, it's going to say: 'Responsible for the death of the Canadian mutual-fund industry.'" But the York University finance professor and Ontario Research Chair replied: "It's not my fault. Blame the data." Tim Shufelt looks at the battle over mutual fund trailing fees.
Desperately seeking lower investment fees? Don't act too quickly
The level of fee awareness among Canadian investors rates maybe a C- or D+. And yet, there is a small but growing slice of the investing public that isn't just aware of the cost of investing. No, these people are frantic about fees. They feel they must reduce their costs and they're keen to get moving. Example: A reader e-mailed recently to suggest places where she and her husband could invest at a lower cost than they're paying now. But switching on fees alone is a bad plan. Investing costs can only be assessed properly when viewed alongside services rendered. Rob Carrick takes a look at how you should assess your fees.
How Warren Buffett uses numbers to gauge a stock's qualitative strengths
Warren Buffett continues to feel the weight of nearly $100-billion (U.S.) in cash on Berkshire Hathaway's balance sheet – not an ideal situation for a guy who always wants dollars to be working for the shareholders. But this legendary investor didn't get to where he is by acting hastily or impulsively. He has made a long and successful career of looking before he leaps. What exactly does "looking" involve for Warren Buffett, arguably the most famous investor of all time? John Reese explains using his Buffet-inspired stock-screening model.
Experts tackle three myths about ETFs
Canadian exchange-traded fund growth continues to hit record monthly highs, with a total of $134-billion in assets currently under management in more than 600 funds, yet misconceptions continue to pop up when it comes to ETF investing. Industry pundits Daniel Straus, ETF research analyst for National Bank Financial, and Alan Green, head of iShares Capital Markets for BlackRock Canada, sat down on Tuesday during the S&P Dow Jones Indices ETF conference in Toronto to debunk several common myths that exist when trading these securities. Clare O'Hara outlines their discussion.
Discount brokerage Series A funds come under regulatory scrutiny
Securities regulators are stepping up efforts to review the types of funds being sold through discount brokerages, particularly those funds that charge for advice where no advice is given. Earlier this year, the Investment Funds Institute of Canada (IFIC) reached out to regulators, asking them to adopt a rule that would ensure mutual funds that carry an embedded adviser fee are only sold in channels where advice is offered. These funds – commonly known as Series A mutual funds – account for 68 per cent of the total amount of funds sold in Canada, according to IFIC. Clare O'Hara explains.
Beware the 'mutual fund category from hell'
The mutual fund industry never looks worse than when you consider the money market fund. Yes, these fossils are still home to billions of dollars in investments from retail investors. A reminder of this sad truth came recently in an e-mail from investor advocate Ken Kivenko. The subject line read: "The money market fund from hell." Rob Carrick explains why you don't want to own one of these relics.
Stelco plans $150-million IPO
Stelco Holdings Inc. plans to raise $150-million in an initial public offering, money that the Hamilton-based company will plow into production of high quality steel for auto makers and construction projects. Andrew Willis and Greg Keenan explain.
Fourth-quarter tax planning can make the most of capital losses
If you're an investor, there are plenty of tax savings available by simply being smart. As we head into the last quarter of the year, investors should consider the following ideas related to capital losses to cut their tax burden for 2017. Tim Cestnick explains.
Is your portfolio ready for a sharp correction?
Bull market, long may you run. It's been going flat-out since 2009, and U.S. equities have surged to record heights, leading skeptical observers to wonder whether a crash is just around the corner. Although no one can accurately predict a crash, investors need to take stock – pardon the pun – of what's in their portfolios. A steep downturn could be devastating for retirees or those nearing retirement if they are ill-prepared. Joel Schlesinger explains.
Others
The week's most oversold and overbought stocks on the TSX
Friday's Insider Report: Companies insiders are buying and selling
Thursday's Insider Report: Companies insiders are buying and selling
Wednesday's Insider Report: Companies insiders are buying and selling
Gordon Pape: My Aggressive TFSA Portfolio has gained almost 9% annually
Number Crunchers
Nine Canadian oil and gas stocks poised to rebound further
Ten U.S. capital goods producers that are paying dividends
Six stocks that could be bargains in the retail space
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What's up in the days ahead
Rob Carrick this weekend looks at the argument for taking your CPP early - yes, early, which goes against a lot of common advice these days. And don't miss John Heinzl's big launch of his new, expanded dividend portfolio next week.
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Compiled by Gillian Livingston