The Fund Facts
disclosure document is given to every investor in a mutual fund. Fund Facts
provides key information about the fund. Some of the useful information provided
includes the MER, top 10 holdings and past performance. Fund Facts however does
not provide information on the fund’s investment strategy, the risks involved
in owning the fund and the actual amount of trailing commission that the fund
will be paying dealers (it merely discloses a range from 0-1%).While Fund Facts
doesn’t provide all the information necessary to make an investment decision,
at least the information provided is not untruthful - EXCEPT
for the trailing commission payment with respect to owners of the fund with an
account at a discount broker.
exactly do we say that fund facts is untruthful? Take the TD Canadian Equity
Fund – Investor Series Fund Facts document
for example. Extract from TDAM Fund Facts:
the trailing commission: The trailing commission is an ongoing commission. It
is paid for as long as you own the fund. It is for the
services and advice that your representative and their firm provide to you. TDAM
pays the trailing commission to your representative's firm, including a
discount broker. It is paid from the fund's management fee and is based on
the value of your investment. The rate is 0.00% to 1.00% of the value of your
investment each year. This equals $0.00 to $10.00 each year for every $1,000
broker is registered as an Order Execution Only dealer which means that it
cannot provide any personalized advice or services to investors. It cannot
provide any service that could be perceived to be personalized advice or could
influence an investor to make a purchase.
Who are the players that are involved with Fund Facts? They include the fund
sponsor, trustees of the fund, the Independent Review Committee that is
supposed to opine on conflicts-of-interest, the Portfolio Manager who is
responsible for the diligent management of the assets of the fund and of course
the securities regulator who approves the FF document for delivery to
prospective investors in the fund.
Any client with an account Agreement with a discount broker is entitled to use
the information and tools provided on the dealer’s website. If the client
wishes to buy a stock, bond, exchange-traded fund or an actively managed fund
ETF, they could use the information and purchase the fund for a nominal
commission rate, typically about $9.95., a one-time payment.
Fund Facts however, asserts that the self-directed unitholder must pay up to 1%
for advice and services, advice and services that any client with an account
has access to. The assertion is simply untrue and is harmful to investors.
Holding a mutual fund paying such a trailer does not give the unitholder any
additional benefits that he or she does not already have as a result of being a
client of the discount broker.
If a client owns a portfolio of say $50,000 of such funds, he/she will pay $500
per annum for the number of years they own the fund instead of a $9.95
commission charge at the time of purchase as is the case for other securities. If
the DIY investor holds the funds for 5 years, the amount paid will be $2500,
more if the fund has appreciated in value, instead of $9.95. That’s 250X of overcharging!
The long-term impact of these falsely described, misleading commissions can
devastate retirement income security.
This untruthful Fund Facts disclosure
also harms all unitholders when fund assets are used to finance the commission
payments to the discount brokers. Their returns will be reduced by the amount
of commissions removed from the fund for no purpose that benefits the fund .The
only winners are the fund companies who acquire more assets upon which to levy
a management fee and the discount brokers who receive cash for no purpose. Main
Street is left holding the bag. As John Bogle, the founder of Vanguard funds has
remarked “The scandal isn’t what’s
illegal, it’s what’s legal”
Our question to the gatekeepers, including securities Commissions, charged with
protecting investors is simple -Why are you allowing this broad daylight
The good news, such as it is, is that
securities regulators will not allow mutual funds to make trailing commission
payments to discount brokers after June 1, 2022. The bad news is that these
payments can continue up to this date without any requirement to provide
rebates to clients for the years of overcharging.
Fund Facts was designed to assist investors. Instead, the actors involved have
turned it into an evil, destructive instrument that harms self-directed investors.
All of them should be held to account for their negligence, greed, incompetence
and breach of their lawful duties and mandates. Caveat