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The case for banning fee-based accounts

I was inspired to write this article based on an article that I read from a high profile investment councillor firm who advised their readers to avoid all F-class (fee-based) investment funds. I thought that advice was an extreme view.

However, if one could build a case that fee-based accounts are truly evil incarnate, what arguments could one use?

Summary and Conclusions

Fee-based accounts are not new. They were traditionally used strictly for wealthy investors who could afford the costs but if regulators ban commissions and all investors are forced to use fee-based accounts, small to average investors will likely see higher costs; higher costs for service and advice, higher on-going account fees to maintain and retain their fee-based accounts, higher compliance costs and higher accounting fees to hire a tax professional to properly deduct deductible fees on their personal tax returns plus endure even more accounting costs to calculate yearly capital gains/losses for non-registered accounts. Investing is becoming complicated.

Although I can whole heartedly recommend fee-based accounts for some investors, many other investors would be better off with embedded commission structures. They are simpler to understand, can be cheaper and are much simpler to handle with respect to taxation. And if U.S. reports are credible, represent fewer conflicts of interest.

Canadian regulators are proposing a single fee-based business model for all investors despite reports of significant U.S. regulatory concerns with that model. Based on the U.S experience, it is clear that no single investment model works best for everybody. Investors are unique and have different requirements depending on their personal circumstances. Let’s keep both models –perhaps making improvements to each.

More choice is better than less choice.

References:

Class “A” shares or Class “F” - which one is better?

After-tax considerations for fee-based accounts

Fee-Based Brokerage: Will They Work For You?

General disclaimer:

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness.

Before acting on any of the above, please make sure to see a professional advisor for individual financial advice based on your personal circumstances.

Opinion disclaimer:

The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.