What to know about fee-based accounts and pooled funds
Fee-based accounts, wrap accounts, pooled funds — the financial landscape is cluttered with new products, and many advisers are aggressively promoting them to clients.
Unfortunately, judging by the questions we’re receiving, many people don’t understand what these options are, how they work or whether they’re a good deal. Here’s a rundown that may help you decide.
Fee-based accounts. If you have a standard brokerage account, registered or non-registered, full-service or discount, you pay a commission on most transactions. When you buy or sell stock, you are charged a commission based on a scale set by the firm. In the case of load mutual funds, you either pay a commission upfront or purchase your units on a deferred sales charge basis, which means you have to pay if you cash out before a certain time (a typical holding period is seven years).
Fee-based accounts eliminate all those charges while giving you full flexibility in your investment choices. There are no trading fees and no mutual fund commissions. As well, some companies offer special fund units (usually called “F” units) for fee-based accounts. These units have a reduced management eense ratio (MER), which means more of the profit (or less of the loss) passes to you. For example, the standard “A” units of the Bissett Canadian Equity Fund have an MER of 2.46 per cent. But the “F” units charge only 1.39 per cent. That means the annual return on the “F” units will be more than a full percentage point higher than that of the “A” units. This can add up over time.
The financial adviser makes money by charging you an annual fee, which is a percentage of the total value of the assets in the account. RBC Dominion Securities charges from 0.5 per cent to two per cent, depending on the size of the account – the more money you have, the lower the percentage, but you need $5 million or more to get the best rate.
Who it’s for: Consider a fee-based account if you do a lot of trading and/or if you have a significant amount of money invested in mutual funds that offer the “F” units option. Get a quote from your broker on how much you will be charged, and then do some math to see if switching to a fee-based account makes sense.
Disadvantages: You must play an active role in the investment process. If you are not comfortable making these decisions, look for a different choice. Also, some accounts place limits on the number of free trades you can do.
Pooled funds. Technically, all mutual funds represent “pools” of money from many investors. However, the term is generally applied to funds offered only to institutions (such as pension plans) or high-net-worth individuals. Pooled funds offer lower MERs and commissions and, therefore, better bottom-line returns. They are also usually “pure” funds. That means a Canadian equity pooled fund will normally have no foreign content, unlike most ordinary mutual funds. The significance of that purity can be seen in the three-year results of the MB Canadian Equity Value Fund (a pooled fund) and the Maclean Budden Canadian Equity Value Fund (a regular mutual fund). Both are offered by the same company and have the same management team. But the pooled fund had a three-year average annual compound rate of return of 10 per cent (to Nov. 30, 2003) while the mutual fund gained only 4.3 per cent annually. Reason: the pooled fund’s returns were not dragged down by the surge in the value of the loonie since it contains no foreign content.
Who it’s for: Pooled funds are a good choice for people with a lot of money who want to pay the lowest possible fees for the best returns. Maclean Budden, one of the leading providers of these funds, says the average high net worth client pays an all-in cost of about one per cent.
Disadvantages: The high entry level. In most cases, you’ll need at least $100,000 to get into a pooled fund. For the top echelon funds, such as the Maclean Budden offerings, the minimum is $500,000.