Christian Charest: Do you buy your mutual funds through a fee-based advisor? Do you hold six-figures or more in your mutual fund account? If your answer to either of those two questions is yes, it might be a good idea to double-check with your fund provider to make sure you're being charged the right fees.
As was discussed in a recent Morningstar article, there's been a string of settlements over the past few years where fund dealers, brokers and fund companies have had to pay millions of dollars to their clients. In most cases, the offending company did one of two things.
First, fee-based advisors – who are paid a percentage of the account total directly by the client -- would put their clients in funds that have embedded dealer compensation through trailer fees, but they would also include these assets in the calculation of their compensation, essentially double-charging their clients. Fee-based advisors are allowed to buy funds that pay trailing commissions, but they have to exclude them from the client's asset total when calculating their fees.
The takeaway here is that if you have this type of account, take a close look at your holdings. If you hold mutual funds that are not F-class, there's a good chance the funds pay your advisor directly via a trailing commission that reduces your fund's returns -- typically about 1% for equity funds and 0.5% for bond funds -- so make sure those funds aren't included in your asset total for compensation purposes, or you'll be paying the fees twice.
The second scenario involved fund companies that offer lower-fee units for clients that hold assets above a certain threshold, usually in the hundreds of thousands or in the millions of dollars. For many clients that qualified for these accounts, the dealer failed to transfer the assets when they reached the threshold, and the clients continued to pay the higher fees. It's probably a safe bet that a lot of these investors were unaware that these lower-fee accounts were even available, but the settlement documents by the Ontario Securities Commission made it clear that if fund companies do offer these options, the onus is on the dealer to have a mechanism in place to make sure clients who qualify are automatically transferred.
If you have a six-figure mutual fund account, it's probably a good idea to ask your advisor whether these funds have lower-fee options and what the thresholds are. Or, if you have the time, do the research yourself by reading the fund's prospectus.
For Morningstar, I'm Christian Charest.
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