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www.insideHALTON.com · OAKVILLE BEAVER Thursday, August 16, 2012 · 10 The risks in changing mutual fund management M utual fund management changes can make life difficult for individual investors who own those funds. Investors want to make money and so do the large corporations controlling these mutual funds. Often the financial interests of the fund company and that of its investors are at opposite ends of the spectrum. This year, there is an example of this potential conflict with a large Canadian mutual company. AGF is suing a former money manager and several other parties because the manager was recruited away from AGF by a U.S. competitor for their new Toronto office. In this situation, there are two components to dis- Shopping marathon today RegisteR start sh today, o & We'll s pping. hip it FREE! tributing mutual funds. There is the mutual fund company, which creates and operates a mutual fund, and the mutual fund money manager, who is responsible for investing the money. The more money that is invested in the mutual fund, the more the mutual fund company collects in management fees and the more profit it makes. The money management business is no different than other businesses where there are competitors who have the same profit motivation. Assume this U.S. firm has two options for opening a Canadian office. They could start slowly and build an office or they could raid a competitor and lift a skilled and established investment management team from another firm. In the latter case, they would instantly have a cohesive group that would continue to be in demand within the Canadian market. In this case, the U.S. firm lifted a wellknown money management team from AGF. We will assume that this was in their financial interest. The third stakeholder in this story is you, the mutual fund investor. Natural market forces of big business do not always consider your financial interests. Often investors will select a fund because of the fund manager. Perhaps you consider past performance only as an investment Dollars & Sense By Peter Watson guide where that performance figure was generated by the manager. The manager of your money is the important element. Your simple solution is to follow the manager and transfer your money to the new firm so your favourite manager can continue to manage your funds. That is easier said than done and there are several reasons for this. Fees are an important consideration. If you have purchased the fund through the often used method of a Deferred Sales Charge, the investment representative would have been paid a sales commission that is often five per cent of the value of your initial investment. If you withdraw your funds from that mutual fund company while they are still on the Deferred Sales Charge cycle, a period of approximately seven years, you will be charged an exit penalty. That could be as high as five per cent. For an investment of $50,000, the cost to you would be $2,500. Will you have to start a new Deferred Sales Charge cycle at the new firm, which could result in another fee if you leave that firm? Fees are good for those who work in the financial services business but they are costly to investors. If this investment is outside of your RRSP or RRIF account, following the manager to their new firm will require you to sell the original investment, which may result in a taxable gain. The net result is good for the new firm who gets your money. The sales charge makes this profitable for your investment advisor and our federal government may receive revenue from capital gains taxes. Everyone wins. Well almost -- everyone but you the investor. The investor pays these fees and taxes and those payments reduce the ultimate return you get from your investment. During the recent challenging years of investing, these extra costs are a burden. If you invest in mutual funds be mindful of the fact that managers do change companies. Discuss this risk with your advisor and understand all of the potential costs that a management change might create. -- Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI.