A Guide to Safe Investing and Fraud Prevention from the Nova Scotia Securities Commission

March is fraud prevention month and this year we’re focusing on knowing your adviser. Choosing a financial adviser is a big decision. An adviser can help you set financial goals, choose investments and track your progress. It is an important relationship, and you want to get it right. When choosing an adviser, you want to ask the following questions:

1. Are you registered?

Nova Scotia law requires financial advisers to be registered (some exceptions apply). Registration helps protect investors because firms and individuals can only be registered if they are properly qualified. Firms and individuals are registered by category—each category has different education and experience requirements, and permits different activities.

2. What is your background?

You want someone who is qualified and has the right experience to give you the help you need. Ask follow-up questions like:

• What are your educational and professional qualifications?
• How long has your firm been in business?
• How long have you been with the firm?
• How long have you worked in the industry?
• What professional associations do you belong to?

3. How are you paid?

Advisers can be paid by salary, commission, a flat fee, or a combination of these methods. If an adviser is paid by salary, the cost of their advice is built into the products you buy. Many advisers are paid a commission for every product they sell. Other advisers charge a flat fee based on an hourly rate or a percentage of the assets in your
account.

4. What kinds of products and services do you offer?

Not all advisers offer the same products and services or have the same expertise. Some specialize in certain kinds of investments. Others can offer you a wide range of investments and services.
If you’re an experienced investor, you may want an adviser who offers a wide range of products and lets you choose. If you’re newer to investing, you may be more comfortable with fewer choices and more guidance from an adviser.

If you already have a financial adviser, have you checked his/her credtenials lately? Research from the CSA 2012 Investor Index reveals that 60 per cent of respondents with a financial adviser have never completed any form of background check. Canadians need to carefully choose who they hand over their money to.

For more information 

 Great article on Financial Advisers

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On a recent episode of CBC’s Marketplace reporters went undercover to the top five Canadian banks to reveal “sneaky ways” banks profit at your expense. The third segment talked about mutual funds and the bank’s “dirty little secrets” for collecting fees.

I am here to tell you that there are no “dirty little secrets” when it comes to mutual fund fees. Investors just need to know the right questions to ask and that starts with understanding the fee structure.

The main mutual fund fees commonly paid by Canadians are sales charges and ongoing fund fees. Seems pretty straight forward right…wrong. These two charges come with a lot of baggage and it’s important for investors to first understand the different fee options when purchasing mutual funds.

The first fees when purchasing mutual funds are sales charges. These charges are transaction-based fees paid directly by investors either at the time they buy the fund or at the time they exit or redeem from the fund. It all depends on the fee option selected: front-end, back-end or deferred. The deferred option or DSC seems to be the one that causes the most confusion for investors. DSC is like purchasing a back-end fee, but the difference is the longer the investor holds the investment the less the redemption cost. The cost can even become void after a certain amount of time. This is known as the “redemption schedule”. Investors should pick the fee option that best meets their investing needs.

Let’s move on to the more complex fees called ongoing fund fees. These fees are paid indirectly from fund assets and cause the investor’s net returns to decrease. When it comes to ongoing fees, an important acronym to remember is MER. A mutual fund’s management expense ratio or MER tells investors the costs of operating and distributing a mutual fund. The MER is the total of a mutual fund’s annual operating costs expressed as a percentage of the fund’s average assets for that year. In Canada, the MER is made up of two major components: management fees, and operating expenses.

A management fee that many investors don’t seem to know about is trailing commissions which can give the impression of a “dirty little secret” hidden from investors. A significant portion of the management fees earned by most Canadian mutual fund manufacturers on the mutual funds they manage is used to pay an ongoing commission to dealer firms. This is referred to as the “trailer fee” or “trailing commission” embedded in the management fee charged. Remember all investors pay management fees, even mutual funds sold without any sales charges. MERs are clearly outlined in the prospectus investors are given about the mutual funds. What’s a mutual fund prospectus?

The mutual fund prospectus will also describe the operating costs, commonly called administration fees. These costs are allocated to mutual funds as they are incurred and can fluctuate every year.

This information is not meant to deter you from investing in mutual funds, but rather to help you make smart investment decisions. The main point I hope you take away from this post is, if you’re looking to invest in mutual funds, know the fees before you agree.

The information for this blog post was provided by the Canadian Securities Administrators (CSA) Discussion Paper and Request for Comment 81-407 on Mutual Fund Fees. Please take the time to read this document as it explains everything I talked about in great detail. Happy Investing!

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