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Meet a mutual fund that makes good money and yet at the same time shows why we need to reform the way investors pay for funds and advice.

It's the RBC Canadian Dividend fund, fourth-largest among mutual funds with assets close to $10-billion. On performance, it's consistently ahead of its benchmark index and the average for its peers. On fees, it's quite reasonable, at least on the surface.

Dig deeper and you find a strong argument for securities regulators to follow through on their study of mutual fund fees and separate the cost to investors of owning a fund from the cost of advice.

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The fees that investors pay to own most mutual funds include a "trailing commission" that is channelled to advisers who sell funds and their firms. It's designed to pay for the ongoing advice and client service that define a productive adviser-client relationship.

Trailing commissions are a big part of RBC Canadian Dividend's 1.78-per-cent management expense ratio, which is a definitive measure of how much it costs to own a fund (the MER is almost all fees associated with owning a fund expressed as a percentage of the total assets in the fund). In fact, the trailer for this fund is 1.0 per cent, although disclosure documents say it can go as high as 1.15 per cent. That compares to 1 per cent for the vast majority of funds that hold stocks and 0.5 per cent for bond funds.

Now, what do these plus-sized trailing commissions buy for people who own RBC Canadian Dividend? David Birkbeck, RBC's head of dealer business practices, wrote in an e-mail that the bank employees who sell funds in branches help clients with "establishing financial goals, asset allocation and portfolio construction, investment solutions, retirement planning, tax reduction strategies and ongoing monitoring and rebalancing."

Mr. Birkbeck said RBC's in-branch fund sellers include account managers, senior account managers and financial planners. Account managers have the certification needed to sell funds, while planners have financial planning credentials.

You'll have to take a look at RBC's in-branch mutual funds sales force and decide for yourself if there's a structure in place to give clients a level of ongoing attention that is commensurate with a trailing commission of 1 per cent. Call me skeptical, especially in light of what I've heard about the sales focus that some banks put on their in-branch financial planners.

This is why securities regulators must make the cost of owning funds separate from advice costs. As it is now, investors are paying for advice, whether they get it or not.

But, really, why should anyone care about the trailers embedded in RBC Canadian Dividend when the fund has been such a consistently good money maker? There aren't many mutual funds I'd suggest as a "can't really go wrong" choice for the masses, but this is one (several banks have similarly good dividend funds, by the way).

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The reason is that as good a fund as RBC Canadian Dividend is, it's still an example of how investors can be taken advantage of when fees are hidden. Here's something else you should know about the trailers on this fund – they're not typically paid to the branch people who sell it. Mr. Birkbeck said most staff are paid salaries and bonuses, while some planners receive sales commissions.

So where does the trailer money go? "Trailing fees provide revenue which supports the advice and service provided to clients, as well as the operational elements of distributing mutual funds," Mr. Birkbeck wrote. To paraphrase, the money goes back to the bank.

Securities regulators issued a discussion paper on eliminating trailing commissions late last year and solicited comments from all interested parties. The subject will be discussed at a roundtable session on June 7 in Toronto. So that we're all clear about this, the anti-trailer argument is not an attack on advice. In fact, paying advisers and their firms directly would validate what they do as important work with an economic value. By burying the costs, trailers trivialize advice.

Okay, so what should investors do about the trailers they're paying on RBC Canadian Dividend? If you're getting good advice, do nothing. You've got a fund that over the past 20 years has beaten both its average peer return and the S&P/TSX composite index, with dividends reinvested. If there's no advice to speak of, then put RBC and its competitors on notice. If they convince securities regulators to back down on the elimination of trailers, then it's time to check out exchange-traded funds. The classic ETF comes with advice sold separately.



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Category: Canadian dividend and equity income


Management expense ratio: 1.78 per cent

Category average MER:

2.26 per cent

Five-year annualized return: 4.2 per cent

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Category average return:

4.1 per cent

S&P/TSX total return index: 2.1 per cent

Top Five Holdings: Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal

Cash Weighting: 7 per cent

Minimum investment: $500

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For more personal finance coverage, follow Rob Carrick on Twitter (@rcarrick) and Facebook (robcarrickfinance).


An earlier version of this column said the trailing commission for RBC Canadian Dividend was stated as being up to 1.15 per cent, as reported in the fund's disclosure documents. That is the upper range of possible commissions, but RBC says the actual trailing commission charged is 1 per cent. This version has been updated.

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