By: Larry MacDonald
A reader sent in an email with an interesting supplementary to the claim that trailer fees represent the cost of financial advice (in Part I). As you may recall, MacKenzie Financial’s publication claimed that an apples-to-apples comparison of ETFs to mutual funds required that the ETF orange be converted into an apple by adding in the cost of financial advice (i.e. trailer fees).
I pointed out that several academic studies had found mutual-fund advisers added no value to the selection of funds (indeed, likely subtracted it). So why did ETFs need to be adjusted for trailer fees when doing comparisons with mutual funds? Reader John De Goey (a fee-only financial advisor) took this a little further. He noted:
“Call virtually any discount brokerage in Canada … you will find that they all require their investor clients to use A-Class funds. In other words, investors are obligated to pay the trailing commission on a product for advice that is neither received nor requested. This is scandalous! Imagine if Canadian Tire charged people for a muffler and installation if they simply bought a muffler! The Competition Bureau would step in.”
This arrangement further raises questions concerning the view that trailer fees are the cost of financial advice. In this context, it appears to be more part of the cost structure of the mutual fund company. No financial advice or service is provided to the buyer.
In the discussion of trailer fees in Part I, attention had also been drawn attention to a survey that found a minority of financial planners did financial plans for their clients – again raising questions about the value of services obtained through trailer fees. Since then I have come across a post by a financial advisor who paints an even bleaker picture. To quote:
“While many financial planners claim to do financial planning and provide holistic advice, very few actually provide comprehensive planning with written financial plans, as taught in the CFP courses.”
5 Responses to “ “I thought I wanted a mutual fund” (III) ”
Hilarious stuff from MacKenzie.
Reminds of me of the old self-serving Soviet propaganda before they imploded.
Hilarious part is they use a John Bogle (Vanguard founder) comment to support mutual funds vs. ETFs!!! The man who founded the lowest cost fee mutual funds and blasted the mutual fund fee industry lot more severely than this in his book! The man whose Vanguard group ETFs as low 0.07% ETF do not compare at all with 2.5% fee wrap accounts composed of 40% bonds! CHUTZPAH TO the nTH DEGREE! Reading the MacKenzie document I thought I was reading an SNL style joke but no its being serious! Incredulous, they don`t even mention surviorship bias! AHHHH! Sanity now!
By James on Oct 23, 2009
James
The case for mutual funds, such as it is, could have been better presented I felt.
By Larry MacDonald on Oct 23, 2009
Fees do not guarantee good service or good advice.
I have been in the financial industry for more than 10 years and I have found that most clients don’t realize that every financial product whether GIC, Mutual Fund, Mortgage or ETF has a fee attached to it.
What do you get for the fees you pay on your mortgage, mutual fund, GIC or credit card?
Every potential client I meet gets a complete written financial game plan BEFORE they do business with me. (We don’t do tax in depth planning). Then we update it twice a year.
The trail fee in the early years is very small and does not compensate me for my time. By the time the client has accumulated enough to retire I am compensated for all the work we have done.
My clients and I are attached financially at the hip. The faster they retire … the faster I do.
Unfortunately many in our industry close the sale, get paid and never see the client again.
If you pay a fee for something … you need to ask what are you getting.
By Mike on Oct 23, 2009
the investment industry today is as misleading and corrupt as the tobacco industry was fifty years ago. I even know of one lawyer who has now done cleanup/coverup work for both industries.
http://web.me.com/lelford/breachoftrust.ca/Ch_8,_Solutions,_The_end.html
video ending of BREACH OF TRUST. A story of how to steal a fortune in financial markets and never get caught.
By larry elford on Oct 24, 2009
Larry, the Canadian Tire muffler analogy doesn’t quite fit. It’s true that for LOAD funds, the default series is the full trailer version with the same fee as the fund purchased through an advisor. To extend that analogy, there is a third muffler (i.e. no load funds) right next to the other two. It’s just as good (sometimes better) and it costs a lot less. But if people choose NOT to buy it, do you blame the industry?
By the way, it’s not so unique or scandalous. Many retail products or services can be purchased as stand-alones; or bundled with “freebies”. It’s all in the packaging. You may well be paying for freebies even when you don’t get them and the marketing just makes it seem like you’re getting something extra for no cost. I see this all the time. But I don’t see anybody screaming murder.
By Daniel on Oct 24, 2009