Reduce mutual fund costs

In early October, Templeton Management Ltd. announced that the deal to purchase the Bissett funds of Calgary had been closed. The well-respected money management house on the Prairies is now officially part of the huge international Franklin Resources organization, which owns Templeton.

Just another of the growing number of mergers changing the face of the Canadian mutual fund landscape – or at least that’s how it appears at first glance. But underneath, some important changes are taking place that have significant implications for all mutual fund investors.

If you understand what they are and how they work, you may be able to take advantage of them to save yourself hundreds or even of thousands of dollars in sales fees and annual expenses.

Companies’ background
First, a bit of background. Prior to the Templeton take-over, Bissett operated a low-overhead business. The company did not charge any sales commissions, paid minimal trailer fees to dealers, and had a $10,000 minimum investment requirement which kept the unit cost of their back-shop administration at a reasonable level. (It costs just as much to send out a monthly statement to seone with $1,000 in his/her account as to someone with $250,000. The high minimum weeds out the expensive tire-kickers.) Most of the Bissett funds were sold directly by the company.

The Templeton funds, by contrast, are sold by brokers, dealers and planners. They carry an optional front or back-end load, pay competitive trailer fees to sales reps, and charge high MERs (management expense ratios) to cover all these costs.

Clearly, these are two completely different distribution concepts. How can they be integrated?
By moving to an approach that is starting to gain momentum in the Canadian fund industry:
· A multi-class structure.
The Franklin Templeton organization (which is what it will be called in future) has filed a new prospectus with securities regulators across the country. They are expecting to receive approval for it in December.

Future funds
Once cleared, the company will offer its funds in four different classes of units: F, A, O, and I.

We’ll concentrate on the first two classes here, F and A.

F units: Will carry no sales charges of any kind.
So the no-load status of the existing Bissett funds will not only be preserved in these units, it will also be extended to the other funds in the revamped Franklin Templeton line-up.
· This means, for example, you will be able to purchase Templeton Growth Fund on a no-load basis, if you can acquire the F units. I use the word “if” advisedly here, as I’ll explain in a moment.
· Because the F units won’t have to carry the financial burden of a sales charge, they will have a lower MER. Effectively, this means that the low MERs of the Bissett funds will survive in these new F units.

So no load charges and a lower MER. Sounds like a good deal. It sounds even better when you compare these to the A units, which are the ones that will be promoted to retail investors.

A units: These units are structured in the same way the Templeton funds were offered in the past: with an optional front or back end load and a higher MER.

So why would intelligent investors buy the A units when the F units will obviously be much more attractive? Two reasons:
1. They may not ever learn that the F units exist. Sure, they will be in the prospectus. But when was the last time you read a prospectus?
2. Even if an investor knows about the F units, the dealer may refuse to sell them.

Can they do that? Apparently. It’s up to the dealers to decide which units they will make available to their clients. The idea is that the F units will be rationed out only to people selected by the sales rep, perhaps because they have a large amount of money invested. Everyone else gets the A units.

Good to know
This is understandable, of course. If a financial advisor doesn’t get any commissions, the kids don’t eat and the mortgage doesn’t get paid. So they’re not going to give away anything they don’t have to.

But the F units will be available once the prospectus clears the regulatory process. If you know about their existence, you at least have the ammunition to request them. If you’re a good client, the advisor may be hard-pressed to say no.

This multi-class structure is not unique to Franklin Templeton. A few other companies have already implemented it and more are looking seriously at the idea. In another year or two, it may become an industry standard.

Abridged from Mutual Funds Update, a monthly newsletter edited and published by Gordon Pape.