There was a good article in the ROB yesterday about Client Relationship Model 2.0 (CRM2): http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/its-simple-to-get-confused-by-how-much-youre-paying-to-invest-in-mutual-funds/article24914711/?cmpid=rss1&click=sf_globe&service=mobile
A lot of it was what we were talking about in the Financial Post article we were interviewed for here: /in-the-news.html
Maybe we can show this better in pictures? Basically, the Ontario Securities Commission is just forcing the Advisors to explicitly state the "commission" or "trailer fee" that they get paid from a mutual fund company for "farming" out your money to that mutual fund company. There still may be a conflict of interest, but the way the OSC figures it, at least it will now be divulged (starting in July 2016). We figure that by July 2016, trailer fees paid by mutual fund companies will not even exist as they have been eliminated in other jurisdictions like Australia and the UK.
So what the OSC is NOT forcing the Advisors to divulge, at least no where near as explicitly, is the Management Fee that those mutual fund companies charge investors to run the fund. These are usually in the 1.25-1.50% range and that fee is "hidden" or "embedded" (called MER's - Management Expense Ratios which include: Management Fees, Trade Fees, Fund Audit Fees, Administrative Fees, Operational Fees, etc) in the cost of the fund. That is to say, owners of the fund units NEVER see a payment from their account to the mutual fund company. I have yet to come across a prospective private client that knew they were paying these hidden or embedded fees (MER's).
And what is worse, these MER's are very expensive, especially in an environment where 1) studies like S&P SPIVA show that most mutual funds (~80%) underperform their underlying Index or benchmark, 2) we are in a lot return environment (but even if we weren't, who wants to give away capital to a large mutual fund company to underperform the Index? Personally, I have worked too hard for my money to give it away like that) and 3) with the advent and growth of super-low cost Exchange Traded Funds (ETF's) at anywhere from .05% to .40% why on earth would you pay a mutual fund company about 1.25% with an 80% chance of underperforming the Index when you could own the Index for as little as .05%??? Crazy.
The first chart shows the typical Advisor Models to "manage" (or really gather assets and "farm" it out to mutual fund companies). The Yellow bubbles are the hidden/embedded fees that mutual funds charge and Advisors DO NOT need to divulge.
The second chart shows High Rock's fee model. We fully-disclose the cost to our clients of using super-low cost ETF's at around .08%. Compare .08% to ~1.30%. And then compound that out over 10-20yrs in your portfolio and tell me what you get. I know what the number is on $1mm invested today...a lot...check out the third chart.
Why can we do it for so much less? Because we are an Asset Management Firm who manages money on a large scale (for Scotiabank) and can manage private client money the same way - large synergies between our Institutional division and our Private Client division. We are set up to actually manage money, not farm it out. We do use super-low cost ETF's in jurisdictions where we do not have expertise...getting Equity exposure to areas like Asia, Europe, Emerging Markets...these are important areas to invest in to create a well-diversified portfolio but, to be sure, we are not experts in picking stocks in any of those jurisdictions (is anyone sitting in Canada really an expert at doing that?), so we get that exposure the cheapest, simplest way possible...super-low cost ETF's. Now we are pretty adept (some might call us experts) at managing Fixed Income and stocks in Canada, so we manage it "in-house"...that is to say, we do not "hire" other portfolio management companies (like High Rock) or mutual fund companies to manage our client assets.
Have a look at the complexity of the Typical Fee structure at a bank (chart 1) and then compare it to High Rock's Fee structure (chart 2).
One of the most important things about High Rock's Private Client business is that the Partners are invested in the exact same models as our clients. Whatever we do, we do for all of our clients and ourselves at the same time and the same price. You are investing right alongside High Rock Partners.