I manage my own investments and recently discovered they are still receiving the 1% that I thought I had stopped paying my financial advisor. I follow a buy-and-hold strategy with mutual funds and had been trying to avoid the 1% annual fee the advisor was charging for providing periodic reports. I learned that because of the fund series my advisor purchased, that percentage is embedded in the fund’s fees (the MER) and sent directly to the financial institution.
I don’t think this fee should be taken at all or should at least be returned to the client, but the financial institution is refusing. I’ve heard there was a class-action that might force institutions to refund these amounts. Is that true?
Also, where can I move my mutual funds so no one else takes a percentage of my assets? Can I deal directly with mutual fund companies? I’d like to consolidate my holdings if it would save thousands in annual commissions.
Also, I can’t move into a Series D without tax consequences, and the D- or F-class versions aren’t exact duplicates of the series I hold today.
—Shelley
Fund facts and how fees work
Shelley, you’re right to dig into this — fees matter and they compound over time. Every investment product carries costs. The easiest place to start is the fund’s Fund Facts document and the fund’s detailed disclosures. Those documents list the management expense ratio (MER), the trading expense ratio (TER), and whether the fund pays a trailing commission.
The MER is the total annual cost charged by the fund and typically appears near the top of the Fund Facts. That number includes both the product cost (what the fund manager keeps to run the fund) and any trailing commission paid to the dealer or advisor for distributing the fund. The TER, usually shown on a later page of the Fund Facts, reflects trading costs inside the fund and is additive to the MER. Together, MER + TER represent the total ongoing costs of owning the fund.
For example, imagine a fund with an MER of 2.16% and a TER of 0.03% — the total ongoing cost is 2.19%. On a $100,000 portfolio that equals $2,190 per year. In that example, about $1,000 (1%) is the trailing commission paid to the dealer, and about $1,160 is the product cost retained by the fund provider. Important to note: the trailing commission portion is often disclosed on your account statement, while the product cost component usually is not shown there. That is why it’s essential to consult the Fund Facts and confirm both MER and TER to calculate your true cost.
How fees differ by fund series
Many retail investors hold A-class funds. A-class MERs often include a 1% trailing commission. The same investment strategy is often available in other series, commonly labelled D-class and F-class. D-class is typically aimed at self-directed investors and excludes the trailing commission. F-class is designed for fee-based or discretionary accounts and also removes trailing commissions, but instead charges a lower management fee paid directly by the investor or their fee-based advisor.
As a result, the D- and F-class versions of a fund usually have lower MERs because they do not include the 1% trailer. That’s why converting from A-class to D- or F-class can produce meaningful savings over time.
How to reduce the fees you pay
Here are practical steps you can take to lower fees on mutual fund holdings:
- Locate the Fund Facts and the detailed management fee disclosures for each fund you own. Note the MER and the TER so you know the total ongoing cost.
- Identify the fund codes for A-class, D-class and F-class versions of the same fund. The codes tell you whether a version carries a trailer or not.
- Ask your advisor if they will convert your holdings to the D- or F-class version. If they won’t, check whether those versions are available on self-directed trading platforms you can access directly.
- Confirm tax implications before you move holdings. For most non-registered accounts, switching between series of the same fund often has no immediate tax consequence, but always verify with a tax or financial professional for your specific situation.
- Be aware that some F-class funds may not be listed on all self-directed platforms. If you want F-class, you may need to contact multiple platforms or ask your advisor to arrange the conversion.
- Keep copies of the Fund Facts and trade confirmations, and request the fund codes from the fund manufacturer or your advisor to ensure you purchase the correct series.
Regarding the class-action you mentioned: there have been legal actions and industry changes that pressured distributors and fund managers to offer series without trailing commissions in contexts where trailing commissions were not appropriate (for example, on self-directed accounts). However, the availability of commission-free series for accounts serviced by advisors depends on the dealer and advisor relationship. Ask your advisor directly whether they will move you to a D- or F-class version or explain why they cannot.
Finally, be persistent and informed. Knowing the fund codes, the MER and TER, and where those series are available will give you leverage to reduce or eliminate trailing commissions. Even a 1% reduction in fees on a substantial portfolio can translate into thousands of dollars in savings over time.
Letter edited for clarity.
Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and conducts securities related business through Aligned Capital Partners Inc. Allan can be reached through Atlantis Financial Inc. for further information.
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