Rantings!

ASLDirect and Trailer Rebating

The discussion forums are abuzz with questions about ASLDirect and their slow payment of trailer fee rebates. There is also much misunderstanding of what they do and the alternatives.

First a disclosure. I am an independent professional planner CA and CFP and I earn a living helping clients find the most value from their investment company or advisor. EWM did not coin “Costs do matter” but it defines everything we do. EWM also does the trailer calculations for our advisors' clients.

1) Trailer fee. All mutual funds have management fees and many except for F class funds pay trailers of between .25% and 1% to your advisor. Trailer fees should be an issue to anyone that holds funds that pay trailers per year in excess of $360 per year. Usually $80K or more in funds designed for sale by advisors makes trailer rebating attractive, if you do not need or want an advisor. If you pay out $360 per year in account fees but get back $400, $1000 or more this is a win. Remember, the vast majority of funds in Canada were designed to be sold by an advisor and thus pay trailers. Why should an advisor that is not adding value to you receive thousands of dollars in trailer fees, just because he convinced you to buy high cost mutual funds?

2) The rebates. ASLDirect does not return your actual trailer fees. They give you what they determine is the best estimate of what is paid to them in trailer compensation. See ASLDirect is no different from every other dealership when it comes to commissions and trailers. ASLDirect is the dealer, Chris and Adrian are the reps, and they are paid the same standard compensation as other dealer/reps. Their difference is that they take the time (and lots of it) to estimate how much of the earnings could be attributed to each client account. They are simply agreeing to be your advisor and provide the minimum allowed Know Your Client and very rudimentary advice for the flat fee of $360 plus $9.95 a trade.

3) Options. It is in theory possible to approach any advisor in the industry to make the same deal with you if i) they are willing to take on clients for $360 each and ii) they will make the effort to estimate how much they are making off your accounts and iii) Their dealer allows it. There are many dealer arrangements that do allow it, so i) and ii) are the main reasons

Discount brokers are not an option to save on trailers because none currently return your trailers. Discount brokers are collecting advisor compensation without providing advice. Discount brokers, have not been allowed to offer F class funds because they do not offer advice for a fee, yet they are not required to disgorge themselves of trailers and commissions even though as stated, they do not offer advice.

4) Trailer Rebate Payments. As I stated you do not really get back your actual trailer fees. i) ASLDirect will pay your trailer amounts, even those earned in your registered accounts (see tax note below), in cash. If it were your trailer, it would be earned by and in your registered account. Remember, it is really Adrian and Chris's compensation that is being returned. Unfortunately, no mutual fund companies provide client specific details for trailer fee compensation. When your advisor sells you a mutual fund, their commission cheque comes with an explanation by client/account. For trailer fees, the information that is provided with the cheque is limited to the amount of total assets that the rep/advisor has invested with the mutual fund company. There is not even an adequate explanation of how the mutual fund company calculated what was due to each rep/advisor. As an accountant, this has always disturbed me. If your dealer/rep/advisor does not know how much was earned specifically on your accounts, how does he return it to you?

ASLDirect, like others, strives to return 100% of all trailers received and allocates it on a prorated basis across all holders of each mutual fund company's accounts. They use some combination of start of month and end of month average holdings in each account to drive the prorated calculation.

5) Late Payments. I am no longer associated closely with ASLDirect, but I do know that in the past there tardiness was not due to use of the funds in their operations. They were segregating all trailers received for later disbursement. I have no current knowledge so I cannot tell you what the norm is currently or whether this practice has changed. I also know that their tardiness is not new. They have always taken a substantial time to payout trailers. Trailer payments from the mutual fund companies are in the worst case usually 30 days after a quarter. Many fund companies pay every half-month, most monthly and only a handful quarterly. Your rebate money is sitting at ASLDirect even longer than you think. The problem is processing effort and resources. ASLDirect has been blaming computer problems from their inception. This is not an adequate excuse. They have not ever and likely never will bring to bear enough resources to solve their customer service issues. They have made a conscious choice to run their company with fewer personnel than most would deem reasonable. Late payment is just one of the many symptoms. They believe their business is driven by price and lack of alternatives. Great service has never been a hallmark and probably never will be.

Our own internal target for trailer calculation and payment is currently 9 weeks after each quarter. This is only because some of the cash arrives from our dealers at the end of the second month, thus the 9 weeks to avoid rebating cash we do not have yet. It currently takes us 3 to 4 weeks to complete quarterly performance reports for all of our clients and we wish to verify all position information before using it in the trailer-prorated calculations. From this point, it is only a couple of weeks to complete the prorated calculations. It could therefore be done in six weeks but all the cash is not in until 9 weeks after the quarter.

6) Taxes. Unlike ASLDirect, EWM recommended advisors do not return trailers earned in registered accounts by cheque to the client. All trailers earned in registered accounts must be re-deposited to those same accounts. CRA has a long-standing interpretation re: incentives conferred by registered account providers. It is most often called the “Toaster Rule”.

CRA Text: “ Pursuant to paragraph 146(2)(c.4) of the Act, an RRSP must not confer certain advantages on an annuitant or someone who does not deal at arm's length with the annuitant. If the plan issuer confers such advantages, the plan issuer is subject, under subsection 146(13.1) of the Act, to a penalty that is equal to the greater of $100 or the amount or fair market value of the particular advantage conferred on the annuitant or the non-arm's-length person. Examples of these advantages include incentives such as trips, goods, and low interest rate loans. Investment interest and bonus or similar amounts paid into an RRSP by the issuer are not considered advantages.”

We also believe that the RSP itself may be subject to deregistration.

7) Alternatives.

  A) Stop using funds that pay trailers. It is the norm that funds that pay trailers are from fund companies with the highest MERs.

  B) Pay the redemption fees. Sell your high MER funds. The cost of the redemption fees can be substantial, but you must evaluate paying them as an investment. If it cost you 3% once to save 1.5% a year for the next 4 years, it is money well spent. Now 1.5% per year seems impossible so here is an example. The MER on IG Beutel Goodman Small Cap is 3.15%*. The MER on Beutel Goodman Small Cap is 1.43%*. They are essentially identical funds. Honest. The difference in MER is currently 1.72% (it used to be almost 2%). IG says the difference is you also get a representative. Boy, they must be good!

  C) Trailer rebates. If you must continue to hold high cost funds, find a dealer/rep that will take into account the trailers that are being received when setting your management fees. I work with a broker and a mutual fund rep who have low fees (very similar to ASLDirect cost is possible) and discount their charges based on the trailers received.

Gordon Stockman

Vice President - Financial Planning

Efficient Wealth Management Inc.

416 410-9809

gostockman@efficientwealth.com

forum participant - "costdomatter"

*Globefund