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Subject: Mixed News on MF Trailers Another entry into the MF discount game. From this morning's Globe & Mail: Priority Brokerage Inc. of Toronto has launched a "mutual fund appreciation plan" offering clients who hold $25,000 in any one mutual fund for a minimum of three months a small rebate on the total value of their assets.Now if only they'd charge reasonable fees to buy and sell MFs ($25 per trade is the going rate in the US) instead of those ridiculous 2% loads we DIYers would be in heaven. And then they could call it their "mutual fund client appreciation plan." Waddya say Paul?
Thanks Bylo. It was good of you to notice. I do listen CAREFULLY to all comments. By the way, a front end load purchase through our web site, over $25,000 is one half of one percent, not 2%. And remember to do the Present Value analysis on a 25 bp rebate for the long term holder. I don't believe in losing money on any transaction, but I do want to make it as equitable as possible. Thanks again
Paul, How will the " rebate " be paid to the client ?
Investors rejoice, this is only the beginning. Watch for a major announcement from Canada Trust in the next few weeks, that investors will love.
D.R Really?..What news, do you actually know what this news is?..If so please do tell. As a faithfull Canada Trust customer I'd love to hear it. CtMarket Partner just recently announced 29$ Web trading it's not that is it? Thanks
REBATING a client commissions is unethical practice and could lead to a suspension or loss of one's license!
Brent, the information is confidential so I cannot release it now. Keep an eye out in the Globe in the upcoming weeks for the announcement for something you and other mutual fund investors will praise. D.R.
For former bond trader, and for Al, The payment will be made after the calendar half, i.e. as of June 30th. and December 31st. the client will have the choice of payment as a cash deposit to their account, or simply a reinvestment. For Al, I am a Governor of the Toronto Stock Exchange, and have been deeply involved in industry committees both at the TSE, IFIC and CICA level. This is not illegal, and is no different from the choice to rebate trading commissions to active equity traders, or the choice to discount front end load charges. I do not wish to waste valuable space on this forum, so please feel free to call me or E Mail me for further info.
Paul, Here's a proposal for a fee structure that's geared to high net worth investors who do not require advice (perhaps either because (a) they are sophisticated DIYers or (b) they already pay for advice by engaging fee-only advisors.) This fee structure is intended to fairly compensate for the actual services rendered:
Again, thanks Bylo, by the way, I would enjoy having you visit our offices sometime. I have printed this off and will review it carefully. There's no question that we are just beginning to see change coming here. I have always made the point that when you get advice that you want, and it is good advice, it's worth every penny. What we are trying to do, in all areas of our business is create tiering mechanisms that allow for a stratification to occur, from no assistance, to some assistance, to advice, to discretionary management. I'll review the arithmetic and keep it in mind for our next look at pricing. By the way, you may wish to watch Jonathan Chevreau on CBC Newsworld this evening. Paul
Bylo,I wonder if Paul will find the computation error in one of your examples?What a clever test! Bylo,I really like your proposed fee structure for high net worth investors.I look forward to Paul's comments on your proposal.Greenline,Action Direct,etc. would certainly lose many of their favourite customers if Priority Brockerage were to adopt your proposal,or something similar thereto.I'm sure that Paul will want to pay you a royalty for the idea...NOT. Paul,I applaud you for being on the leading edge with the annoucement of partial rebate of trailer fees to certain accountholders. I'll be watching Jon on CBC Newsworld tonight.I presume he will be on their 6:30ET business program?
Without doing much math, it seems to me Bylo's commission structure becomes less attractive when you consider an account with much activity. Consider, for example, contributing to 8 no-load funds semi-annually, for a transaction cost of $400 plus the $200 account fee.
Paul, this is great, and many tahks to Bylo for the post on this. Truly an exciting direction for investors. Bylo, the only comment is that I think the $25k entry level for the premium DIY account with significant rebates is too low - I would think that Paul would be wise to consider a "stepped" process: the basic rebate at $25k to $50k, a compromise towards the Bylo plan for the $50k to $100k range and the "Full Bylo" over $100k. As for the "rebating of commissions" - Fidelity has been doing a variation of this for several years with their "Grandfathered Investment Accounts". For those who do not recall this, when Fidelity increased the MER on the FE load funds several years ago to match that of the DSC funds, they agreed that the pre-existing accounts would receive a credit on a yearly basis equivalent to 0.5% "Management Fee Reduction". In years where the fund generates a distribution the MFR is a taxable income item, when there is no diistribution, Fidelity treats the 0.5% as an ACB reduction. Paul, BTW, how is your firm proposing to handle the rebate of trailers for tax reporting purposes. Taxable, I assume, but as regular income? Warren.
Well I guess I accomplished at least one objective -- to start some reasoned dialogue on the needs of HNW investors. I've thought about the general concept of unbundling fees and the needs of HNW investors for quite some time, but my post and numbers were generated in haste. Rick, I'm sure there's at least one error buried in there but it wasn't intentional. Anyway the numbers are designed to illustrate the general concept. I'll leave it to Paul (and his competitors) to crunch the numbers through their spreadsheets and create a viable business case. Robert, you're right that someone who regularly DCAs into several funds would incur a lot of transaction fees. That's no different from someone who DCAs into a portfolio of stocks. I'm not looking for a free lunch. I strongly believe that one ought to pay a reasonable fee for the services that are rendered. Warren, I agree that $25K is too low. Probably a 6-figure portfolio is a more realistic minimum -- assuming there are enough of such folks to make this a viable business. Some more comments/questions: 1. Right now at E*Trade I can buy all the PH&N and Bissett funds I want and E*Trade gets nothing. No fees. No trailers. Nada. Now I'll gladly eat the free lunches for as long as they're on offer but I too run a business -- when I'm not hanging here ;-) -- and that structure sure doesn't sound fair or reasonable to me. As my proposal suggests, I'm quite willing to pay reasonable transaction fees on no-load no-trailer funds as is the practice in the US. 2. As I read Priority Brokerage's fee schedule, if I have $15K to invest over the Internet... 3. Paul, your press release reads "Clients with $25,000 in any one mutual fund for a minimum of 3 months will receive a 25 basis point rebate on the total value of these assets." Does that also apply to funds that pay a trailer of only ¼%? What about funds that pay ¾% or 1%? 4. I've mentioned this before on a Trimark thread, but if some of the lower MER load fund companies like Trimark and Templeton unbundled their trailers (which is the same as having the dealer/broker rebate them) then their funds' MERs would be competitive with the likes of PH&N, Bissett and Scudder. That ought to result in more sales in the fee-only HNW market.
My initial reaction to Bylo's structure is that it would certainly benefit the buyer of one, single large position in a MF who holds that fund indefinitely, and he's quite right that while we at Prioirity Brokerage have fired the first round, many new innovations will be forthcoming. Hopefully, I have demonstrated our willingness to be a leader and, to be a little promotional for a moment, our clients will benefit! In my experience, even in the discount industry, discerning HNW clients include more than the pure mechanical costs of the relationship in the cost/value equation (such as the willingness of the CEO to engage directly in open and frank dialogue). You will surprised to discover, by the way, that mutual fund order processing is considerably more expensive that clearing and settling a secondary market equity transaction. The average clerical "head count" is higher by an order of magnitude in the MF admin area. In terms of the 25bp decision, we receive trailers which are all over the map, on my entire average client base, 25bp represents about half the fee received, and setting an arbitrary figure of 25bp simply makes the process easy to administer. As a closing comment, please allow me to thank you all for permitting me to engage with you in a straightforward and balanced way. I think this is what the discussion forum was designed for. Paul B
Paul, great comments thanks. But don't stop now: As a closing comment, please allow me to thank you all for permitting me to engage with you in a straightforward and balanced way. I think this is what the discussion forum was designed for. If a client transfers in funds already owned, IOW so there are no FE fees or DSC payments up front, do they still get the 1/4% rebate once the trailers get going? Bylo, e-trade may be a "free lunch" but I think they are clever to offer the most attractive no-loads at 0% - this will "garner" a following with HNW folks who will gladly bring other $$$ to purchase funds that pay trailers. My favorite tale about a short sighted broker was the one who held a $200k RRSP for a client and insisted on a 2% commish on a $5k FE MF purchase. The client was looking for a lower fee and wanted to see how enlightened the broker was: after all the broker was getting trailers from most of the other $200k in the RRSP. OK, OK, the client purchased the $5k funds from the broker but the broker did not get the $75k then being invested outside the RRSP, nor did she get the $100k of investments the following year and she will not see the $100k this year either!! Short-sighted, you betcha !! FWIW, the broker made her $100 but passed up many $1,000's. Warren.
Paul, what about the question of the tax treatment of these "rebates" - has RC given any sort of comment on this or is there an industry standard, "accepted practise"? Warren.
Warren, sorry I forgot to answer this point. Rev Can has not commented on this, but we will be publishing a position for clients in due course. We currently give rebates on regular trading commission for active clients who generate in excess of $500 a month in commission. this would be treated in the same way. The one additional point is that the rebate for funds held inside an RRSP would probably be treated as an additional contribution. Paul B.
And yes, the rebate applies to all funds transferred in to Priority Brokerage, irrespective of how they were acquired elsewhere, i.e. FE or DSC. The only restrictions would be MMF and those funds where no trailers are paid. Paul
Paul, I am wondering about the following comment of yours: The one additional point is that the rebate for funds held inside an RRSP would probably be treated as an additional contribution.
I would think this is a bit on the harsh side - why treat it as an additional contribution - based on this,
FWIW, I have owned Fidelity GIA funds in an RRSP for years and annually get the 0.5% MFR "rebate" and have never had a whisper from Fidelity that this would ever be considered a "contribution" of any sort to my plan.
OK, over to you ....
Warren.
An additional question for Paul. Is the 25K minimum qualification for the rebate calculated on each account or on a per client basis? Eg. I hold $12K Templeton Growth in my RRSP account and $13K in my regular account. Or, say, I hold 13K and my wife holds 12K in our two joint accounts.
For Warren and Ray
In terms of the treatment of the rebate inside the RRSP, this would be our estimate of the Rev Cda treatment. It would be up to you to report the rebate in the manner you choose, after consultation with your tax preparer. In terms of payment of the rebate, we would treat each customer as the basis for calculation, rather than the account.
Thanks,
Paul
Rebates of any kind ( including rebates of DSC amounts ) can be classified as non-receiptable contributions.
"You will surprised to discover, by the way, that mutual fund order processing is considerably more expensive that clearing and settling a secondary market equity transaction."
Paul, that does surprise me. I'd be grateful if you could elaborate.
My naïve logic is (was?) that buying/selling a MF -- with the NAV set once a day -- is something that requires no human intervention and can be easily automated. OTOH executing a stock trade requires two humans to arrive at a mutually agreeable price. That seems (to me at least) far more labour-intensive, hence more costly a service to provide.
Thanks also for taking the time to engage us here. I too am glad that we've all been able to keep the discussion civil despite the conversation's touchy (to some) issue of fees.
Warren,
I agree with your comments re E*Trade. While I do hold some PH&N and Bissett with them, there's also lots of Templeton and Trimark (as well as a smattering of other trailer-generating funds), which along with regular purchases of TIPs and HIPs, generates a steady stream of revenue for them. They're not losing money on my account(s). ;-)
Good thread, Bylo. My argument with you here is not whether transaction fees are "reasonable" but whether they're competitive. I don't like them because I know I can buy low-MER no loads at just that--no load. And if I have $15K to put into the Green Banana Specialty Fund, I don't like a fee structure that penalizes me for investing on the installment plan. (For the same reason, I don't like graduated discounts on FE funds, and I don't buy them.)
Thanks for your participation, Paul. For once you got to participate in this forum without someone trying to trash you. I'm going to be checking your company out further.
thanks for comments.
For Bylo, the reason for high cost of MF processing vs equity is that, if you think about it, MF's are in the process of constant "new issue", and then redemption of units. In effect it's like a prospectus new issue every time someone buys. On the other hand, when a stock is bought/sold/bought/sold on the exhange, it's the same 100 shares simply being re-registered; in fact these days most positions are held on a book-based system and the share certificate itself stays in "street form". The only difference is closed-end funds, which trade like equities.
Paul
Here's Jon Chevreau's (mis?)-interpretation of this thread Trailer-fee rebate could lead to lower fund MERs in today's Financial Post.
Comments?
Paul, I've spent considerable time at your website. I'm quite impressed by what I've seen there. However, I'm still confused over these issues concerning your fee structure. Ordinarily I'd call or e-mail you, but I'm sure there are many others here who have the same questions and are interested in your response. (a) Cost of MF vs stock transactions
I'm curious, Bylo, as to your implication that Chevreau may have misinterpreted this thread.
I loved the following quote from the President of Greenline in the Financial Post article cited by Bylo above:
John See, says current discount fees "are fully justified ... sometimes I think we do too much."
Talk about a "banker's attitude".
Ray W, Perhaps "misinterpreted" was not the best word to use. I felt that Jon's article suggested incorrectly that Priority Brokerage now represented the best deal for MF investors. While they have certainly changed the rules, I'm not convinced they offer the lowest fees under all circumstances. Let me illustrate with a $15K online-discounted MF purchase: Priority Brokerage E*Trade TD GL No-load, no trailer (PH&N, Bissett) $0 to buy $30 to sell $0 fee rebate $0 to buy $0 to sell $0 fee rebate $225 to buy $0 to sell $0 fee rebate No-load, trailer fees (Scudder, Altamira, et al) $0 to buy $30 to sell $38/yr fee rebate $0 to buy $0 to sell $0 fee rebate $0 to buy $38 to sell $0 fee rebate FE Load, trailer fees (Trimark, Templeton, et al) $150 to buy $0 to sell $38/yr fee rebate $0 to buy $0 to sell $0 fee rebate $225 to buy $0 to sell $0 fee rebate
What this shows is that:
Obviously, not everyone's "typical" transaction will be $15K. I used that number because it's about half way to the $25K tier, where both PB and TD reduce their load fees from 2% to 1%. Your mileage may vary. Note also that there are some additional fees not mentioned in my table. For example, PB charges 0.5% for load fund switches. The others don't. The banks waive their annual RRSP administration charges for accounts over $25K. PB and E*Trade don't. To summarise, PB does look attractive but it's not for everyone under all circumstances. As we concluded on the DSC threads last year, choice is good. Rick, See's comments didn't surprise me. The fee structure I proposed above was based on reflections that resulted from some correspondence I had with him a few months ago on the subject of TD GL's excessive fees vis a vis competition like E*Trade. His response then indicated that he just doesn't "get it" (see it?) That's when I decided to vote with my feet.
Answers for Bylo...
Cost of order processing funds vs listed equities.
I would welcome your visit to our offices sometime, to walk you right through the process. The essential difference lies with the amount of manual intervention required for fund sales and redemptions. While the process has become far more standardized in the last decade, there are still fairly wide variations in the transaction processing between dealers and fund companies. In fact, the primary reason for a fund to become "approved" by a dealer is the level of automation, and standardization of procedure. Remember also that when an equity trade is executed, the order is reported immediately, in real time. With a fund purchase or sale, the price is not known until the daily NAV is set. As an aside, this one attribute of closed end funds, which trade on the exhange just like an equity -- some years ago, we used this to our benefit to get out of Latin America quickly by selling our closed end funds into the market, and knowing exactly what our price was. Notice also the number of "nigglies" as discussed in another thread with Doug Steiner, Chief Executive of Versus Technologies, which owns the E Trade licence in Canada, which were almost all about mutual fund transaction, accounting and recording issues -- these all take a large degree of human intervention currently.
Your point about charging some type of annual account administration fee for equity trading accounts is a good one, and it has been tried in the past. Indeed, this "maintenance cost" is one of the motivations for the trend toward "WRAP" accounts. Keep in mind that trading accounts invariably have occasional cash balances, and also use margin borrowing facilities, which are a source of "maintenance" spread income for the dealer. Take a look sometime at the Annual Report of Charles Schwab, for example, and look carefully at the net interest income earned as a percentage of total revenue earned.
Staying with a small percentage charge versus a flat fee, irrespective of amount, is always a question whenever re revisit pricing strategy, and it is analagous to the Telco's long distance versus local charge dilemma. We try to strike a balance with pricing that will earn us a reasonable net profit per client account per year, based upon the expectations of size of account, average asset class breakdown, and activity.
Thanks for pointing out the apparent anomoly in a section of our tiering -- I'll check it out.
Paul B
Bylo - great comparison - I like the conclusion that it is better to buy a Scudder or Altamira thru PB than direct
I thought Jon's article was a pretty good "re-visit" to the issues.
Paul, I would still be interested in the fact that the "rebates" appear to be somewhat disproportionate: one client owns $50k of Scudder Cdn and you are rebating 25 bps out of the 35 bps that you receive (correct?) and a second client owns $50k of a FE fund that pays a trailer of 100 bps and you still only rebate 25 bps? In the first case the rebate is 71% of the trailer while in the second case it is only 25% (IOW, about 35% as much of a rebate when PB is paid the higher trailer).
Now if you were to rebate 71 bps in the case of the 100 bps trailers .... ?
Warren.
Hey, We've got to start somewhere.......
It really is that simple. I want to ensure that we have a process which can be accounted for without:
a) error b) having to add even more admin overhead
Yes, it certainly benefits holders of some finds over others that pay a higher trailer, but remember, a few days ago no-one got anything back!
Paul B
Yes, it certainly benefits holders of some finds over others that pay a higher trailer, but remember, a few days ago no-one got anything back!
... And all the more reason to buy a fund like Scudder over the FE funds, since the price discount is greater on their funds.
I applaud your approach Paul, differential discounts and all. At least you are contributing to what hopefully will become a greater degree of competitiveness in the industry and spur your opponents on to match (or better) your lead. Keep one step ahead of them and maintain that important first-mover advantage.
Choice is good. More choice is better.
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