Have a candid conversation with advisor about mutual funds

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Maureen Jensen, chair of the Ontario Securities Commission, acknowledges Canadian mutual fund fees are the highest in the world.

The winds of change continue to blow in the financial services industry.

Hopefully, in the not too distant future, hidden trailer fees charged by mutual funds will be banned.

A trailer fee is an embedded commission paid to the financial advisor whose clients own a mutual fund. There are those in the industry who believe this may be why some financial advisors recommend certain funds over others.

Since mutual funds are the most popular investment vehicle in Canada, this has implications for most investors.

In January, the Canadian Securities Administrators (CSA) released its most recent report on mutual fund embedded trailer keys. The report recommended a ban on all such hidden fees.

One of the most interesting aspects of the report were the reactions from various groups to the likelihood hidden trailer fees will be banned.

Banning fees is all about transparency, and there is a fair amount of transparency in the way various groups have reacted.

There is a popular expression, “follow the money,” to find out the logic behind differing opinions. In this case, hidden commissions send money away from investors and to financial advisors.

Maureen Jensen, chair of the Ontario Securities Commission, acknowledges Canadian mutual fund fees are the highest in the world. The CSA report predicts mutual fund fees would decrease if embedded commissions were eliminated.

Jensen’s comment clearly puts her on the side of investors. Get rid of hidden commissions and mutual fund fees will be reduced. The client wins.

The Portfolio Management Association of Canada had an opinion too. It said investors are best served when there is transparency about the fees they are paying. They are also on the side of investors. They say “no” to hidden trailer fee commissions.

These opinions favour lower fees and transparency to the benefit of investors. A contrasting positon was offered by the Investment Funds Institute of Canada (IFIC).

IFIC said there was no justification for banning hidden trailer fees and said harmful conflicts of interests are already disallowed under current regulation. So, its vote is to continue with hidden fees and therefore maintain the high cost of mutual fund ownership by Canadians.

While industry participants continue to debate the issue of hidden trailer fee commissions charged on mutual funds, investors can exercise their influence on an industry they rely on to manage their financial assets.

If you believe that hidden mutual fund fees are wrong, then I would encourage you to have a candid conversation with your financial advisor. Does your advisor benefit from hidden mutual fund fees?

If you own such mutual funds, ask your advisor if there are better alternatives that would have lower fees and a greater probability that you will get higher investment returns. If there are better options available to you, then you have some decisions to make.

Should you change the investments you hold in your portfolio? Should you change advisors?