Investors with larger accounts stand to benefit from mutual fund companies’ ongoing efforts to reward loyalty by reducing the management fees on product offerings.
Most of Canada’s largest asset-management firms have introduced preferred-pricing programs on their mutual funds – which typically provide a tiered discount to unitholders, with minimum account thresholds ranging from $100,000 to $250,000 – amid increasing competition from lower-cost exchange-traded funds (ETFs) that many of these same firms have also launched.
Although these programs already provide a welcome break on costs for investors, there are expectations that mutual fund companies will keep paring fees in an effort to retain and attract more clients.
“Competition based on price will continue,” says James Gauthier, head of mutual fund and ETF research at Industrial Alliance Securities Inc. “The marketplace has only gotten more competitive via the proliferation of ETFs.”
Last year, net sales of ETFs – new money minus redemptions – outpaced net sales of mutual funds for the first time in Canada since the global financial crisis, according to the Investment Funds Institute of Canada’s 2018 Investment Funds Report. Specifically, net sales of ETFs were $20.5-billion while mutual funds had net sales of only $109-million.
Although having discounts on fees for clients who have invested a minimum level of assets makes mutual funds attractive, “the vast majority of accounts at these fund companies are at levels well below the higher-net-worth threshold,” says Mr. Gauthier. Thus, only certain clients are benefiting from this trend. If mutual fund companies were to cut fees for all of their products, it would “cost them millions of dollars in margin.”
In response to pressure for regulators to ensure clients are in the lowest-priced products available to them, mutual fund companies now are switching unitholders automatically into their preferred-pricing programs if these investors have enough assets to qualify. Fee breaks can be in the form of a lower management expense ratio (MER) or a rebate, with unitholders getting more fund units. That move, in turn, effectively reduces the MER.
As a result, financial advisors need to keep on top of the specifics of preferred-pricing programs – in addition to investment performance – to determine what’s most suitable for clients, Mr. Gauthier says. For instance, rebates are taxable as earned income in a non-registered account, he adds, which “may be less desirable for some people.”
The lower-fee programs can differ vastly. Those wrinkles can range from a minimum threshold tied to one fund, to an account holding several funds, to specific series of funds that are eligible for the discount.
For example, AGF Investments Inc. offers preferred pricing for investors with a minimum of $100,000 per fund or $250,000 – which could be in various funds – when combining household assets from family members at the same address. Depending on the mutual fund series, the fee break could be in the form of a lower MER or a rebate that’s reinvested into additional fund units for unitholders.
On the other hand, CI Investments Inc. has a $100,000 threshold per individual account or per family group whose members need not live in the same house. In addition to an MER reduction for only certain series of funds, CI also offers a high-water-mark protection whereby unitholders don’t lose the fee concession should their assets fall below the threshold during a market downturn.
In April, a sister company to CI Investments, Assante Private Client, which caters to investors with $1-million or more in investible assets, also reduced management fees by an average of 25 per cent in its pooled funds.
“We wanted to make it easy for our advisors to compete in the high-net-worth marketplace,” says Damon Sutherland, senior vice-president, sales and wealth services, at Assante Private Client. “We had to bring our fees in line with a lot of competitors.”
Although advisors at Assante Wealth Management (Canada) Ltd. previously had discretion to reduce fees in certain situations, the new fee schedule is now standardized and more transparent, says Mr. Sutherland. (The old fee schedule was a holdover from when CI Financial Corp. acquired Assante in 2003.)
But while some mutual fund companies are putting a greater emphasis on their preferred-pricing programs, others are stepping back from theirs and taking a different approach. For example, Capital International Asset Management (Canada) Inc. has abandoned its program, which previously required a $125,000-minimum threshold per fund to qualify.
Instead, the firm began extending access to lower fees in 2017 to unitholders in its Series F mutual funds, which are sold through fee-based advisors. The program was expanded to include mutual funds with embedded trailer commissions this past autumn.
“We have found a way that we think is a lot better for investors,” says Mark Tiffin, president of Capital International, which has about $12-billion in assets under management in Canada. “If you have $500 [in our fund], you have our premium or high-net-worth pricing.”
It has long been the firm’s policy to lower fees so that investors can enjoy the benefits of scale when a mutual fund’s assets keep growing, says Mr. Tiffin. For example, the MER for the Series F units of Capital Group Global Equity Fund has dropped to 0.83 per cent from 1.16 per cent during the past 15 years.
But Mr. Tiffin expects that competing mutual fund companies will keep trimming costs on their product offerings as well. “It’s a maturing industry,” he says. “The trend is that fees are clearly coming down.”
The preferred-pricing programs are really part of what mutual fund companies are doing to stay competitive among advisors, says Dan Hallett, vice-president and principal at HighView Financial Group.
“They want to retain and maybe get back the share of the advisors’ sales that are going more to ETFs,” says Mr. Hallett. “You look at all the ETF businesses, and their growth strategy is not about wooing the do-it-yourself investor. It’s about getting on advisors’ platforms.”
The fee concessions for larger account sizes generally top out at around 30 basis points, he says. But given the relatively high fee levels, any progress in reducing them is a good thing. “It should have been done a long time ago.”
Mr. Hallett says he would not be surprised if mutual fund companies broaden access to lower-fee funds, perhaps similar to what Capital International has done. “We could see more of that. It’s a simpler way of doing it.”
An alternative is that mutual fund companies could lower the minimum thresholds to qualify for the preferred-pricing programs, he says.
“I wouldn’t be surprised if, at some point, it gets down to $50,000 or $25,000 – at least for certain products,” Mr. Hallett says. “It might be more of a balanced fund or a fund-of-fund product because those are the ones geared to smaller account sizes.”