|ASL Direct offers mutual fund trailer fee rebate|
May08: OSC Issues Temporary Cease Trade Order Against ASL Direct Inc..
Most mutual funds pay a trailer fee to the advisor, broker or dealer where you hold the funds. This annual fee can be as much as 1% of the value of the fund. You won't see this fee deducted from your account because it's buried in the fund's Management Expense Ratio (MER). Check the fund prospectus to see if it pays a trailer fee, and if so, how much.
Trailer fees are supposed to compensate advisors for the ongoing financial planning services they provide their clients. However, funds pay the same trailer fee whether you receive these services or not. In particular, discount brokers receive the same trailer fees as the most experienced financial planners even though they provide no advice.
Discount brokers argue that they need trailer fee revenue to pay for their expenses in administering your account. On the surface this makes sense since by-and-large they no longer charge front or back end load fees. But still, 1% of your assets just to hold a portfolio of mutual funds does seem excessive. Moreover, commissioned financial planners provide all the same services as discount brokers, plus they provide financial planning services for exactly the same remuneration.
If you don't require financial planning advice and you're not receiving it, then why pay for it?
Now you may not have to. Mutual fund dealer ASL Direct offers to rebate all trailer fees in respect of your account. Instead they charge a flat $30 per month plus a $10 transaction fee for each fund purchase or sale after the first one in each month.
Is this a good deal?
Well, it depends.
If you own mostly funds that pay little or no trailer fees, then the rebates likely won't offset the monthly fees until your portfolio is well into 6 figures.
For example, if you own funds that pay a 1% trailer fee and you buy or sell funds infrequently, then it will take a portfolio of just $36,000 to offset ASL Direct's $360 per year in account administration fees.
But if your funds' trailer fee is only 0.1% -- which would be the case if you own CIBC's index funds and qualify for their MER rebate program -- then you need a portfolio of at least $360,000 in order to break even. And if your portfolio is invested in funds such as PH&N, which pay no trailer fees, then you can't benefit from this program no matter how large your portfolio.
Note too, that ASL charges for each additional account, as well as for RRSP account administration. If your family has several taxable, joint, RRSP, RRIF, RESP, etc. accounts, then their fees can add up quickly.
Still, it's worth looking at your situation to see how much you're paying out in hidden trailer fees compared to how much it would cost the ASL Direct way.
Caveat: Taxation of Distributions
ASL Direct used to take the position that "the rebating of the annual embedded trailer fee will reduce the adjusted cost base (ACB) of your mutual funds holdings by the amount of annual embedded trailer fee rebated back to you the investor." This means that when a fund is held in a taxable account, income tax on the amount of the rebate can be deferred until you sell the fund. This position was at odds with IFIC's opinion that similar rebates are taxable as ordinary income when they are received. Currently ASL Direct "strongly recommends that each individual investor seek tax advice from a registered tax professional."