Proprietary investment funds and financial well-being

 

A proprietary fund is a fund where the sale and manufacture of the fund are part of the same corporate entity. The obvious advantage of this arrangement is the company makes profit on managing the fund AND on selling it.

If the salesperson does not offer a variety of competitive funds to you, it reduces your choices and could mean you are not being offered the best funds for your needs. “Best “includes such characteristics as risk, cost and performance.

Sometimes Reps selling prop funds are rewarded more for selling these funds instead of better, more competitive funds. Over time, this skewed advice can materially impact your returns and retirement income security.

Another issue with proprietary funds is transferability between dealers. In some cases, it may mean you will have to sell the fund because it cannot be transferred “in kind”. This could trigger unwanted capital gains tax exposure or sale at an inopportune time.

Be aware too that bank-owned discount brokers may not offer competing funds so you may need to shop around.

Some prop funds can be out- performers of course, just be sure you understand the potential downside of dealing with a Firm that only sells proprietary funds.

Professional financial advisors would not normally put themselves in such a conflicted position. It should be noted though, that securities laws do not prohibit Firms from restricting their product shelf to proprietary funds.  In fact, most bank branches only offer their own proprietary mutual funds.

 

Caveat Emptor. Control your own financial destiny or someone else will.

 

Fund Facts has a dirty little secret

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.

 

So why exactly do we say that fund facts is untruthful? Take the TD Canadian Equity Fund – Investor Series Fund Facts document
https://www.tdassetmanagement.com/Fund-Document/pdf/Fund-Facts/TD-Mutual-Funds/TDB161E.pdf for example.  Extract from TDAM Fund Facts:

“More about 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 invested.”

A discount 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 robbery?

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 Emptor.