RBC flexes its muscle on fund fees

85 funds affected as market leader's pricing becomes cheaper and simpler.

Rudy Luukko 29 February, 2016 | 6:00PM
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RBC Global Asset Management Inc. today announced a vast array of management-fee reductions that will affect 85 of the nearly 200 funds in its $180-billion fund family, Canada's largest.

Ranging from five to 15 basis points, depending on the fund and the fund series, the price rollbacks will take effect on June 30. They will save investors an estimated $25 million in the first 12 months, Doug Coulter, president of RBC Global Asset Management Inc., told Morningstar. He noted that these savings will continue on an ongoing basis.

In terms of the impact on individual investors, the improvements in fund performance resulting directly from the lower fees will be modest. For instance, let's assume a $1,000 investment held over 10 years, and returning 5% before fees; if the management fee is lowered by 15 basis points from 0.75% to 0.60%, the investment will grow to $1,534, or $23 more than under the previous fee. The larger the investment, of course, the greater the dollar value of savings.

More important when making fee comparisons is to consider how the overall management fees compare. Since RBC's fees are already generally below average, the new round of price cuts will widen the gap between its management fees and the industry medians.

In a related move, RBC GAM announced a strategic shift away from discounted fees for its biggest accounts. It will phase out its reduced-fee Series H and Series I funds for large accounts, also starting on June 30. Some of the funds in these series will be redesignated as series that require only a $500 minimum purchase, while others will be either no longer available to new investors, or else closed outright to any new purchases.

The effect of the elimination of the high-net-worth series is that the management fee on an RBC mutual fund will be the same for all investors, regardless of the size of their accounts. According to RBC officials, these fees will generally be cheaper than what is charged by high-net-worth programs offered by competing mutual-fund companies. And, they add, there will no longer be any need for the paperwork now required to switch clients with large accounts from the regular RBC retail series to a high-net-worth series.

"Increasingly, the marketplace has become more complex in terms of options for clients," Coulter said in an interview. "Our view is that clients want transparency. They want something that's simple and easy to understand, and they want low fees."

The wider significance of RBC's new price regime, given its industry-leading 14.5% market share, is that it provides what could serve as unofficial benchmarks on the costs of actively managed funds.

As Coulter observes, what mutual-fund companies charge for fund management is best measured by using F-series funds. The reason is that fee-based funds do not make any commission payments to brokers and dealers out of their management fees. RBC GAM's management fees on F class are consistently below their category medians, as measured by Morningstar, and the company is driving those fees even lower. (For example, the median management fee charged by Canadian equity funds in Series F is 0.85%, according to the latest Morningstar data, which is 10 basis points higher than RBC's current price point. That gap will widen to 25 basis points after June 30.)

After the reductions that take effect at mid-year, RBC's management fees for Series F will range from 40 basis points for Canadian and short-term fixed-income funds, to 60 basis points for core Canadian and U.S. equities and global fixed income, to 75 basis points for core international and global equities.

RBC's fund fees by asset class
Asset class Current Series F
fee (%)
New Series F
fee (%)
Canadian and short-term fixed income 0.50 10 0.40
Global fixed income 0.75 15 0.60
Core Canadian equity 0.75 15 0.60
Core U.S. equity 0.75 15 0.60
Core international and global equity 0.85 10 0.75
Source: RBC Global Asset Management Inc.
Note: Series F pays no trailer commissions to dealers.

Other series cost more because of the cost of embedded sales commissions. For instance, add another 25 basis points for RBC's Series D funds that are purchased by self-directed investors and held in discount brokerage accounts or through PH&N Investment Services, an affiliated mutual-fund dealer. For Series A funds that pay a full trailer commission, the RBC management fee including embedded commissions ranges from 50 basis points higher for domestic fixed-income funds to a full percentage point for equity funds.

For specific RBC funds, the fee reductions, if any, will depend on where the fund fits within RBC's pricing framework. Most notably, out of RBC's extensive line-up of about 35 balanced funds, fund-of-funds portfolios and target-date funds, only one fund will reduce its fees. Jonathan Hartman, vice-president and head of investment solutions at RBC GAM, says these funds were generally about 20% cheaper than the medians in most categories.

"We're quite comfortable with the price levels we have" with balanced funds, Hartman says. (The only balanced fund affected by the upcoming price cuts is the $1.1-billion RBC U.S. Monthly Income, whose fees will be reduced by 10 basis points across the board for all retail series.)

In some instances, fee reductions will apply to one or more series of a fund, but not to others. For instance, RBC's largest equity fund is the $15.8-billion RBC Canadian Dividend, whose Series A fee remains at 1.50%, while the fees for Series F and Series D will be reduced by 15 basis points. The rationale here is that RBC's share of the Series A fee (which pays a 1% trailer commission) is already below RBC's price point for core domestic equity funds.

In another prominent example of selective price reductions within a fund, the $8.8-billion PH&N Bond is cutting its Advisor Series and Series F fees by 10 basis points -- to 0.40% and 0.90% respectively -- while leaving its Series D unchanged at 0.50%.

RBC's announcement of extensive fee cuts coincides with the collapse of fund sales in early 2016. It's an abrupt turn for the worse after five consecutive years of record sales.

In January, normally one of the fund industry's busiest months, RBC reported net redemptions of $90 million in long-term funds. This is consistent with the mutual-fund industry as a whole, with the Investment Funds Institute of Canada reporting $533 million in net redemptions of long-term funds. As for short-term funds, RBC had $89 million in January redemptions, while IFIC reported industry-wide net sales of $453 million.

Coulter said the RBC organization as a whole is seeing as much money coming in from investors as last year, but that recent market volatility has caused investors to shy away from mutual funds. This year's most popular choices for RBC clients are high-interest savings accounts and one-year GICs. Coulter said RBC's fee reductions have been in the planning stages for about a year, and are not in response to the recent downturn in fund sales.

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About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

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