How Mutual Fund Sales Are Compensated In Canada and Ways You can Lower Your Investment Costs

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article contributed by

Thomas Venner, CFP®, MSc

Certified Financial Planner at Altimum Mutuals Inc.

Extensive experience in Retirement Planning, Financial Planning for Women and Life & Critical Illness Insurance.

In Canada, most mutual funds pay what are known as ‘trailers’ to firms and advisors. It is a cost that can be embedded in the MER (Management Expense Ratio) of a fund through the ‘service fee’. While there are a handful of mutual funds that do not charge a service fee (and resulting trailers), most of them do. Segregated funds offered through Insurance Companies have very similar compensation arrangements to mutual funds but often with higher costs incurred through addition of principle protection insurance.

The Representative Sample Fund

Our sample fund is a Canadian Equity mutual fund that has a management fee of 1.25% and ‘other fees and expenses’ of 0.25% (brokerage costs, administration expenses, etc). Therefore the mutual fund manufacturer’s fee to operate this fund is 1.50%. The manufacturer is the company that actually picks the investments and runs the portfolio.

The manufacturer also adds a ‘service fee’. It is this service fee from which commissions are generated. The typical ‘service fee’ is 1.00%, with a few exceptions as noted below. As a result the MER of this fund would be 2.50% which is made up of the management fee and other operating expenses (1.50%) plus the service fee (1.00%).

Front-End Load Mutual Funds

A front-end load version of this mutual fund pays an ongoing trailer to the advisor of the typical 1.00%, meaning the advisor will receive 1.00% of the average value of your investment in this fund over the course of every year. The advisor additionally has the ability to charge you a front end sales charge between 0% and 5% which gets deducted from your investment immediately (Advisors may sell a front-end version of a fund with a front-end fee of 0%).

If you invested $100,000 into a front end load fund with a front end load of 2%, your initial investment would be decreased by $2,000, leaving $98,000 to be invested and your advisor would further earn a 1% trailer per year of the amount in your account.

DSC Funds or Back-End Load Mutual Funds

Most commonly known as DSC funds, and also as Deferred Sales Charge funds and Declining Sales Charge funds. DSC funds pay your advisor an up front commission of 5% which is not subtracted from your initial investment deposit. The fund manufacturer pays the advisor in advance for the future service fees that will be generated. The ongoing trailer fee to the advisor is usually reduced from 1.00% to 0.5% in exchange for the lump sum, up-front commission.

It is also important to note that if you sell out of these funds you are subject to a redemption fee for up to 7 years. The redemption fee typically starts at 5%-6% in the first year and then gradually declines to 0% after 7 years, hence these funds are sometimes referred to as ‘declining sales charge’ funds. After the 7 years there would be no fees to sell out of these funds.

This redemption fee is basically the fund company’s assurance that the up front commission to the advisor will be accounted for should the investor sell out before the future service fees can be generated. Basically, if you sell out of your fund after year 1, you pay a 5% penalty that covers the fund company’s initial commission to the advisor. The service fee charged by the fund remains at 1.00%. The service fee shouldn’t be confused with the trailer fee the advisor receives, which for DSC funds is 0.5% as mentioned above.

If you invest $100,000 into a DSC fund your advisor generates a $5,000 commission right away, and you still have $100,000 invested. The advisor additionally receives an ongoing trailer fee of 0.5% of the average value of your investment every year.

No Load Funds

No load funds have no initial front end fees, nor do they have any DSC fees. The advisor will generate a 1.00% commission every year based on the average value of your investment – they receive no up-front commission for no-load funds, just the ongoing trailer fee.

If you invested $100,000 to a no-load fund, you will have nothing deducted from your initial investment and you advisor will not earn an up-front commission but they will still earn a 1.00% commission based on the average value of your investment every year.

Low Load Funds (Sometime referred to as Level Load)

This is a “lite” version of a DSC fund with an up front commission which is lower, averaging 2-3% versus the DSC’s 5%. The redemption fees generally start at 3% and decline to 0% after 3 years instead of the fees starting at 5% and declining to 0% after 7 years for DSC funds. The trailer fee is initially set to 0.5% and increases to 1.00% as the redemption fee schedule expires. This is why it is also known as ‘level load’.

If you invested $100,000 into this type of fund, you are not docked any money up front. Your advisor receives $2-$3,000 as an up-front commission and 0.5% of the average value of your account in the first year. He or she will receive 0.50% of the average value of your account in the second year, 0.5% in the third year and then 1.00% every year thereafter.

F-Class Funds

The ‘F’ stands for ‘Fee based accounts’ funds. These are relatively new types of accounts that charge clients a transparent fee that is easily seen on statements (called the Client Advisory Fee). This was introduced to address complaints of investors not knowing what they were paying their advisors as the compensation was essentially hidden and not well disclosed. For the F-Class version of a fund there is NO service fee. So for our sample fund, that would mean that the MER of the fund has been reduced from the 2.50% in all the previous cases to 1.50%. BUT to make an apples to apples comparison, you would need to add the Client Advisory Fee to this amount to determine your all-in cost.

There is one important advantage of fee-based accounts for non-registered investment portfolios in that it is possible to claim the Client Advisory Fee as a tax-deduction on your tax return (you need to have your accountant verify this for your own situation to be sure). Say your management fee was 0.5%, in this case, if your marginal tax rate was 40%, then the after-tax Client Advisory Fee would be effectively 0.30% instead of 0.50%, meaning your out-of-pocket costs for an f-class version of a fund in a non-registered account would be 1.80% versus 2.00% for all the other fund versions.

If you invested $100,000 into an F-class mutual fund, your initial investment would not be docked any up-front charges, and your advisor would not receive any up front commission. The advisor would receive a percentage (some advisors charge up to 1.50%) of the average value of your account every year. I negotiate the management fee based on client assets, level of service required etc. Typical range is from 0.25-to 1.0%). There would be no cost to sell out of the F-class fund. For non-registered accounts, your Client Advisory Fee may be tax-deductible (check with your accountant).

The Commissions and Trailers are Split by the Advisor and His/Her Firm

As a final note, all the commissions noted above may not necessarily go to the advisor but may be split between the advisor and the advisor’s firm. This varies between 40-80% from firm to firm.

Tailoring Advisor Compensation with “flexible fee” options

A number of the fund companies offer platforms that allow the client and advisor to negotiate the fee structure such that overall MERs can be decreased by adjusting the advisor fee to a lower amount than the standard levels described in the previous examples. Dynamic Funds and Manulife Mutual Funds allow this flexibility with a $100k minimum investment per fund. Invesco Trimark has a minimum of $50k per account to achieve this flexibility. Many other companies now offer this feature with similar or higher minimum values.

Using Invesco for example, you can have a portfolio in say your RRSP with a minimum of $50,000 spread amongst a number of funds (F Class). You can then negotiate the “trailer fee” paid to the advisor. So, using the $100k example, if the MER was 2.25 for the portfolio and you set the advisor trailer to 0.5% instead of 1.0%, the MER now drops to 1.75%. This saves the client $500 in “fees” on the $100k portfolio.

Other Ways to Lower Your Fees

You should always talk to your advisor about lower fee options. Some fund companies have lower fee structures for index/ETF type funds or in some cases within their mutual fund offerings. For example, almost all the major companies will offer a Canadian Dividend Mutual fund, most of which end up owning a very similar group of stocks. However, some may charge an MER over 2.6% while others are available with an MER of 1.6% or less.

Another way to save on fees is to separate the fixed income portion of your portfolio from the equity portion. Many investors purchase “Balanced” mutual funds that may be 50% Fixed Income and 50% Equity. Let’s say the MER for our hypothetical balanced fund is 2.25% and the “trailer” is 1% to the advisor. The MER for the “pure equity” exposure of the fund might be 2.5% and the “bond” portion might be 1.50%. Usually fund companies pay lower fees to advisors, typically 0.5%, for bond funds. In this case, by purchasing the equity fund and bond fund separately the overall blended MER is now 2.0%, thus saving the client 0.25% in costs.

In my practice I use all of these strategies to lower costs for my clients. It should be noted that investments are just a portion of your overall financial plan. All purchases should be made keeping in mind the asset allocation you and your advisor have agreed upon in your Investment Policy Statement (IPS). This document takes into account your investment objectives and risk tolerance. Remember, “trailer fees” are paid to your advisor for advice and guidance with financial planning issues. If you are not getting these services from your current advisor, why are you paying these fees?

Thomas J Venner is a Certified Financial Planner (CFP®) in the Golden Horseshoe area of Southern Ontario and offers Fee Based and Fee Only Financial Planning options ( For contact information, visit his profile HERE.

Author: Thomas Venner, CFP®, MSc