January 2017 – Year-End Statement Changes
If you’ve been following the financial news recently, you may have read about some upcoming changes to your year-end account reporting. These new reports will include a detailed overview of the performance of each of your accounts and the fees associated with it.
The new sections of the report to review are the ‘Annual Performance of this Account’ and the ‘Annual Charges and Commissions’. These new sections will tell you things like, your account’s unique rate of return, its growth in dollars, and how much you’ve paid in fees and commission to Manulife Securities.
These changes are a welcome addition to our portfolio statements because they allow us to communicate with you more effectively.
Given these changes, we thought it might be a good time and a good idea to talk about how we get paid. Our fees and expenses can be summarized by the following infographic.
Currently, the majority of our income comes from trailing commissions. They are paid to us by the mutual fund companies we utilize to build investment portfolios for our clients. These trailing commissions are different from what you might think of as the more traditional form of commission, that is charged when you buy and sell something (like a stock for instance). Trailing commissions or “trailer fees” are ongoing fees that we receive from the mutual fund company in lieu of us charging clients directly.
These trailer fees are paid out of monies generated by mutual fund MERs and are split between Manulife Securities and LGK Wealth Management. MER stands for management expense ratio, and it is simply the cost for an investment company to run a mutual fund. It is calculated as a percentage of the money that the mutual fund is managing on behalf of its fund holders.
Once trailing commissions have been paid, the remaining mutual fund MER goes to pay the expenses of the fund company.
Of note, a fund that has a higher MER does not imply a higher trailer commission to us as advisors. The reason is twofold. First, and most importantly, when we consider an appropriate fund manager for our clients, all things being equal, we will always opt for lower fee options. Secondly, over the last year or so, fund companies that once paid higher than average trailer fees have been reducing them to a fairly common industry-wide level.
More recently, many of our clients that have had mutual fund portfolios are transitioning to what we call, ‘Fee based’ portfolios. These portfolios may still hold mutual funds; however, investment management fees are paid to Manulife Securities and LGK Wealth directly from your account, rather than indirectly through mutual fund trailing commissions. The MERs for these mutual funds are much lower because they no longer have to pass along any commission to us.
Whether it’s trailing commission from mutual funds, or an investment management fee that you pay directly to us, we thought you might be wondering where those fees go. We break it down into three areas: advice, services, and infrastructure.
Let’s start by looking at advice. Gary’s job at LGK is to oversee all of the portfolio manager and investment selection.In addition to running diagnostic analysis on the thousands of mutual funds that can be purchased in Canada, Gary also does extensive qualitative research. This might be as simple as reading regular commentary from the portfolio managers that he is following. It could also mean, listening to monthly conference calls, talking with investment managers or their representatives directly, or attending off site due diligence conferences where manager’s insights can be gleaned in much greater detail.
But that’s just scratching the surface. Your fees may also go to the following:
- portfolio construction
- monitoring and rebalancing
- retirement planning
- tax minimization and estate planning strategies
We think one of our most important jobs is helping you stay invested and ‘on plan’ through both good and bad economic cycles.
Beyond advice, there are also the services of the business that require people and staff to ensure the operation runs smoothly. Some of those behind the scene services are account openings, transaction processing, trade confirmations, account statements, client communication and updates, technology and future enhancements, as well as regulation and compliance.
Finally there’s infrastructure. We lease the office space at 9945 -50th Street and we buy good quality furnishings for our office to make it look nice. We pay for utilities, phone, internet, computers in addition to numerous other costs.
In conclusion, we are proud of what we do, and will continue to do it for the decades to come. We are grateful that you’ve chosen us at LGK Wealth Management to be your family’s wealth advisors and look forward to continuing to grow with you and your family.
You will be receiving these reports later this month and should you have any questions we urge you to call us at 780 426 2400 or e-mail us at firstname.lastname@example.org. We want you to feel really comfortable when reading your statement.