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Will funds cover fees caused by HST? As if Add to ...

A reader phoned the other day because she couldn't get any straight talk about mutual fund fees from her investment adviser.

She wanted to know, first, how fees affected her returns in dollar terms and, second, whether those fees included compensation to the adviser for ongoing client service.

Got to love calls like this. Every reader query about fund fees is a light in the darkness of investor ignorance about mutual funds.

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Thanks to the mutual fund industry, there's reason to expect more questions like this. Every time someone in the industry complains about the impact of Ontario's harmonized sales tax on the cost of owning funds, it helps to rouse investors from their stupor. What ... fees... mutual funds ... what's this all about?

The July, 2010, introduction of the HST will add an extra layer of taxation onto mutual fund fees. As it stands now, the 5-per-cent GST is applied to the fees that represent the cost of owning a fund. With the HST, investors all across the country could end up paying an additional 8 per cent because many firms are based in Ontario.

The fund industry wants an exemption for funds so that just the GST applies to fees. Oh, the unfairness, fund executives are telling everyone. It's as if the government has maliciously slapped a new tax on savings.



Six rules of fund fees

  1. Returns are always net of fees: What you see published is what investors actually made.
  2. Almost all funds have fees that include a component to pay your investment adviser: A full percentage point of the average equity fund's management expense ratio is paid to an adviser and his or her firm on an annual basis.
  3. Fees are always paid, regardless of performance: In a flat year for markets, your fund's returns could be negative after fees.
  4. MERs don't represent all costs: Trading costs are extra.
  5. Fee information is easily obtainable: Ask your adviser, or check a fund company's semi-annual report on fund performance (on your fundco's website, or through sedar.com).
  6. Don't forget buy and sell, transfer and short-term trading fees: You may be asked to pay 1 or 2 per cent of your investment as a purchase commission, or be subject to redemption fees of up to 6 or 7 per cent if you sell early.




There's a lot of concern these days about whether an aging Canadian population is saving enough money to pay for a secure retirement. Removing all taxes from mutual fund fees would be a small but meaningful way to help people earn more in their retirement savings accounts and elsewhere. But these are tough economic times and governments justifiably may not want to do that right now.

A classy response by the fund industry would be to continue to lobby government for tax relief, while promising to eat any additional fees that results from the HST. What a public relations coup that would be. Fund industry stands up for investors.

As if.

Truth is, the fund industry thinks investment advisers are its true customer base because they do so much of the actual selling of mutual funds. Individual investors, the end customer of those funds, are secondary.

Remember the fund industry market-timing scandal of 2004-05? It remains a teachable moment in terms of how fund companies view their investors.

Several of the big firms used to allow wealthy clients to trade in and out of funds in a way that was both off limits and harmful to rank and file investors. Regulators responded by requiring certain companies to pay investors just over $205-million in restitution.

Now, the fund industry is casting itself as an advocate for investors by fighting the HST. It's not credible.

The HST will make fees higher, but this is just a symptom of a greater problem. Here in Canada, investors pay hefty fees to own mutual funds. These fees erode returns, which have been scarce to begin with for many investors.

Sure, the stock markets have soared from their March low. But many equity funds are still down over the past three-year period.

And then there are the hugely popular bond funds everyone is buying these days. The average fee in this category is 1.7 per cent, even as a five-year Government of Canada bond yields 2.5 per cent.

And then there are those hugely popular money market funds, where fees have neutralized returns almost completely. In fact, some fund companies have had to cut fees so their money market fund clients don't lose money.

Forget about making money, though.

Investors are slowly waking up to the reality of fees. Billions have come out of money market funds and into high-interest savings accounts, which pay close to 1 per cent or more right now and benefit from deposit insurance.

Exchange-traded funds, a much cheaper alternative to mutual funds, have become a lot more popular.

But the fund industry isn't suffering. Sales of funds outside the money market category (they're called long-term funds) are running at or near peak levels. Last week, TD Mutual Funds reported its strongest November on record for net sales of this type of fund.

Mutual funds are an ideal way for lots of people to invest, but they've been getting a free ride from investors and advisers who act as if price is no object.

That's crazy - price matters when buying houses, cars, furniture, toothpaste and mutual funds. Pay less, keep more for yourself - it's a basic concept of consumer self-advocacy.

More investors are starting to grasp this, but it's a very slow process.

The fund industry's self-serving crusade against the HST may help.

Follow me on Facebook. I'm at Rob Carrick - Personal Finance.

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Follow on Twitter: @rcarrick

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