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ted rechtshaffen

As a financial planner, I see many prospective clients who show me their mutual fund portfolios. Given that Canada has some of the highest mutual fund fees in the world, we are used to seeing fees of 2.4 per cent and higher.

Investors Group, however, stands out among fund companies in Canada because their fees often hit around 2.7 per cent. This is but one of the red flags I find when reviewing Investors Group portfolios.

I should preface all of this by saying that Investors Group is a competitor of mine.

But as one of the largest financial organizations in Canada, it is a company that has an impact on many investors. So I think it is important for Canadians who own their mutual funds to be educated how that might impact their financial world.

Here are my five main concerns with Investors Group:

1) Weak Performance Investors Group has 15 funds with holdings of over $1-billion. According to GlobeFund's 5 star rating system, 6 funds are 1 star, 4 funds are 2 star, 4 funds are 3 star, 0 funds are 4 star, and 0 funds are 5 star. One fund is not rated.

2) High Fees This certainly impacts on the poor performance issue. Eleven of the 15 funds have fees over 2.50 per cent (up to 2.71 per cent). On the 'low' end, there are 3 fixed income funds with fees of 1.95 per cent, 1.96 per cent and 1.97 per cent. As a comparison, RBC Canadian Equity fund has a fee of 2.05 per cent. The Investors Group Canadian Equity fund has a fee of 2.72 per cent. The RBC fund has a 5 year annualized return of 1.02 per cent, where the Investors Group fund has a 5 year return of -3.86 per cent. It isn't like the RBC Canadian Equity fund is a star performer. It is a middle of the road 3 star fund, but it looks very good in comparison.

In the Canadian Bond category, a 3 star fund like the TD Bond fund has a fee of 1.11 per cent and a 5 year return of 5.24 per cent. The Investors Group Bond fund has a fee of 1.96 per cent and a 5 year return of 4.45 per cent.

3) Majority of funds are sold with Deferred Sales Charges At a time when many advisers and firms have meaningfully decreased sales of mutual funds using a deferred sales charge, Investors Group doesn't seem to have slowed down. What that means is that in many cases, an investor can not sell out of the Investors Group fund family within seven years without having to pay an additional fee – the deferred sales charge. And because a good percentage of the funds are sold with a deferred sales charge, a percentage of clients end up with even higher fees if they sell and pull money out of Investors Group within seven years of buying the fund.

The following deferred sales charge schedule comes from the Investors Group Simplified Prospectus – June 30, 2011. By the way, this 'Simplified' Prospectus is 321 pages long.

When you sell your units

You pay

Within 2 years after you bought them

5.5% of the amount you sell

During 3rd year after you bought them

5.0% of the amount you sell

During 4th year after you bought them

4.5% of the amount you sell

During 5th year after you bought them

4.0% of the amount you sell

During 6th year after you bought them

3.0% of the amount you sell

During 7th year after you bought them

1.5% of the amount you sell

More than 7 years after you bought them

No fee

4) Some clients feel trapped Because of the deferred sales charge, some Investors Group clients stay invested in the funds for seven years even though they would have liked to go elsewhere. If a person decides they want to manage their assets themselves or work with an advisor outside of Investors Group but do not want to pay the deferred sales charge, they can't even hold the funds and transfer them 'in kind' outside of Investors Group. This forces the individual to either stay at Investors Group or pay the deferred sales charge to get out. It is like being punished for choosing to work with them in the first place.

5) Fund Mergers Fund that perform poorly often just 'disappear.' As an example, on November 7th of this year, Investors Group announced that eight funds were going to 'merge' into eight other existing funds. Not surprisingly, of the eight funds that are disappearing all have worse one-year returns than the funds they are merging into (or are merging into new funds.) The average 'improvement' in one year numbers is 3.15 per cent. Unfortunately if you owned the old funds for the past year, you are stuck with their performance.

The worst example is the fund merger of the Investors Canadian Dividend Growth Fund into the Investors Canadian Equity Income Fund. If you owned the 'merging fund,' you had an actual three-year annualized return of 1.91 per cent. In a few months if you look at the performance of your fund, you might see a three-year annualized return in your fund of something close to 17.61 per cent. It wasn't your personal performance, but it was the actual performance of the 'continuing fund', the Investors Canadian Equity Income Fund. When these 'merged' funds disappear, it makes it difficult for investors to track their long-term performance.

Fund mergers are certainly done by many mutual fund companies. Investors Group may not do this more than other firms, although it is very difficult to gather this data.

Investors Group declined to comment on the points I outline in this column.

I am not alone in my criticisms of Investors Group. Jonathan Chevreau, a National Post columnist, wrote a blog post last week that if Canadians became truly financially literate, Investors Group might be out of business.

I guess you could consider this column my effort to educate and shed some light on Investors Group and the $60 billion-plus they manage on behalf of Canadians.

Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.

Follow Ted on his blog at The Canadian Financial Planner.

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