Fidelity to ease investor’s fees, advisor’s burden

(November 24, 2004) It may be hard to imagine an arrangement in which three parties benefit, but one of Canada’s biggest fund firms is betting that cutting MERs while increasing advisor payout will lead to better sales and retention.

Fidelity Investments has announced a plan to lower its management fees and MERs on its entire lineup of front-end-load mutual funds. Equity-based fund MERs will fall by 20 basis points, while fixed income funds will have their MER cut by 30 basis points.

“It’s clear to us that investors and advisors are pursuing more choice, more value and more clarity, and I think we’re addressed all three for both audiences with this change,” says Rob Strickland, executive vice-president of advisor and alliance distribution at Fidelity.

The firm will also institute an “auto-conversion” mechanism, which will exchange DSC funds for the front-end load version once the seven-year schedule has expired. This policy will apply to all new DSC funds sold as of January 10, 2005, while Fidelity seeks regulatory approval to apply this policy to existing DSC holdings.

“This was among the top recommendations I get when I meet with advisors,” said Rob Strickland, executive vice-president of advisor and alliance distribution at Fidelity. “They’ve all been asking for an easier means of converting from on-schedule assets and clearly there’s nothing easier than an auto-conversions that will do it en masse.”

Strickland says auto-conversion is a win-win situation for advisors and clients, since the client’s MERs will drop, while the advisor’s payout will increase.

“Per series, advisor compensation will not change, but as the composition of the assets they hold change, the result is that under some circumstances advisors could receive more,” he says.

Fidelity is renaming its front-end load versions as Series B funds, where they had previously been lumped together with the DSC version within its Series A line. The firm recently introduced a low load option, which will be treated in the same fashion as the DSC, eventually rolling over into Series B units. The new low load option is a DSC option with a shorter, two-year redemption schedule and lower redemption charge.

To offer the new lower cost to T-SWP (Tax-Efficient Systematic Withdrawal) investors, Series S will be created with identical lower management fees as Series B. On January 10, 2005, Fidelity will move all existing Series T ISC investors into this lower fee series. Changes affecting Series A and B also apply to Fidelity Capital Structure Corp. funds.

“While the ISC (B and S) series units pay the higher trailer fees than DSC units, they also have lower management fees than either of the other options,” says Dan Hallett, president of Dan Hallett and Associates Inc. “This makes sense since the traditional method has the investor paying a MER that is priced to pay for costs to finance the up front DSC commission.

“Once investors have fulfilled their time obligations of the DSC and LL schedules, they can benefit from a lower fee,” he says. “It’s a good development and one that I hope we will see from other companies. Interestingly, Fidelity is eating the difference as they are not slicing trailer fees.”

Morningstar Canada was also quick to applaud the move.

“Competing firms that market their funds through independent brokers and dealers will be under pressure to respond proactively to Fidelity’s initiative in order to stay at the top of the investors’ list of preferred mutual fund selections,” said Scott Mackenzie, president and CEO. “There should also be a beneficial ripple effect on fund fees in general across all of the industry’s distribution channels.”

Of course, the manufacturer can’t be expected to make such changes without some benefit to itself, and Fidelity says these changes will not have a negative impact on Fidelity Limited Partnerships.

“Part of the motivation is likely to get advisors to take a better look at Fidelity when making recommendations to clients, but there is also a tangible benefit for Fidelity fund investors,” Hallett points out.

He says the move carries more significance than just lower fees, though, and it is one more step toward the demise of the DSC option.

“I think that DSC is dying a slow death,” he says. “Low load will be the DSC of the future.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(11/24/04)

Steven Lamb