Market sees explosion of F-class offerings

(August 31, 2004) In case there was any question that investors are becoming more leery of sales commissions and hidden fees, mutual fund manufacturers have been unleashing a torrent of F-class funds aimed at capitalizing on this trend.

According to a report published on Morningstar Canada’s Web site today, the number of F-class funds is racing toward the 1,000 mark. If the number of these funds is any indication, it would appear fee-based advice is now in fashion, with investors preferring to see fees broken out and clearly stated.

F-class fund units are sold commission free, stripping out that cost and offering investors a much lower management expense ratio. They are designed to allow fee-only advisors the ability to sell funds without charging their client twice. Some feel the absence of a sales commission lends credibility to the advisor’s choice of funds, since they stand to personally gain nothing from their selection.

F-class units were introduced in 2000, with just three firms offering them originally. There are now over 20 firms offering F-class units, typically variants of A-class funds with traditional commission structures. F-class units will have the same holdings and investment mandate of their higher fee cousins.

“The performance will always be augmented by the lower fees, because it’s identical [to the A-class version] except for having that lower MER,” says John Campea, product manager, data services at Morningstar Canada.

“We know that to be true, but we don’t actually have that on a database yet,” says Rudy Luukko, investment funds editor of Morningstar Canada. “You can look at the A-class and draw direct inferences, but in terms of having an F-series database that can look at the actual fund and compare those funds, we don’t have that now.”

Of course, F-class units are available only through a financial advisor, much to the chagrin of the do-it-yourself investors. In April, E*Trade Canada announced it would offer the low cost funds, but the plan was scuppered, apparently by the fund companies themselves as they worried about a potential advisor backlash.

“We believe clients are best served by expert, professional and knowledgeable advice from qualified financial advisors,” AIM Trimark said in a statement in April, after pulling out of the arrangement. Elliott & Page, the only other firm E*Trade had lined up, followed suit shortly thereafter.

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