Trailer hitch

Long ago, far away (well, like the Marriott on the Halifax waterfront or the Waddling Dog in Saanichton) people came out to hear me talk about investing.

Thirty years ago mutual funds were hot and trendy (like me) since they gave folks professional management, diversification and decent returns. There was far less risk buying a fund owning the biggest 500 companies than trying to cobble together a portfolio of ten individual stocks.

So I flogged them. They were the best things going. But people sure paid a price for putting their money in a big pot that was then overseen by some dude in Calgary or Toronto with suspenders, a trophy wife and a Porsche. Whether the fund lost or gained, he got paid. Handsomely.

Most mutual funds are expensive, charging investors annual fees to own them, called MERs (management expense ratios). That money runs the fund, pays the Porsche guy and also kicks back a payment to the advisor or dealer who sold the units into somebody’s retirement fund. The level of fees varies widely across the industry, and for various kinds of funds (bond mutuals cost fast less than those owning stocks). Over recent years they’ve generally declined.

But in Canada the average MER for an equity fund is still close to 2.5%. That’s huge. And mutual fund fees are not tax-deductible. Worse, they’re usually buried. Impossible to avoid. Hard to even see.

Of course the next innovation – ETFs – changed everything. Exchange-traded funds are far more liquid than mutuals, trade on the public market and are massively cheaper to own. Most of them don’t have managers with suspenders and seek only to reflect the performance of a broad index (like the S&P 500).

Since eight in ten ‘active’ fund managers underperform the index, why pay for that stock-picking service? So an equity ETF might have an embedded fee twenty basis points instead of 2% – an elephantine reduction. These days every single client of Turner Investments, for example, owns a stable of ETFs. No stocks. Decent returns, less risk, 100% liquid and cheaper.

The world of investing has been made so much fairer, efficient and successful because of these things. No big MERs. No deferred sales charges. No threat of a redemption halt in bad times. No trailer fees. No waiting to get your money out.

And now, even more incentive, thanks to our vindictive pals at my old place of employment – the CRA.

Here is the bad (worse) news: “Most services provided by mutual fund dealers in exchange for mutual fund trailing commissions no longer meet the definition of financial service and are now considered to be taxable supplies that are subject to the GST/HST.”

What does this ruling mean?

As Dale Jackson points out in the Financial Post, this decision by the revenuers means mutual fund investors will now be shelling out HST (in Ontario, for example, that’s 13%) on unseen fees they pay in perpetuity to the guy who sold them the units. That’s because a big chunk of the MER charged to investors (almost half) is sent by the mutual fund company to the advisor as a trailer fee.

In theory the trailer fee is meant to compensate the advisor for giving ongoing advice and guidance to the investor. And we all know that seldom happens. So it’s actually a sales tool – an incentive, a bribe – for having guided the investor’s funds into that company’s coffers, and keeping it there.

The typical trailer fee is 1%. Thus, on a $500,000 RRSP of mutual funds, that’s five grand, plus a new $650 in tax. Compare that with the $1,000 cost of owning the same half-million in ETFs. A saving of 82%. Not shabby.

“In addition to being hidden, the concept of having a mutual fund company reward advisors for choosing their mutual funds for a client raises questions about who the advisor is actually serving,” Jackson rightly points out. “Is the advisor recommending a fund each year because it is right for the investor, or because it has the highest compensation from the mutual fund company?”

So why would anyone own a mutual when an ETF can do the job with less cost, more cashability and just-as-good performance?

Beats me. But Canadians today own $2.6 trillion in mutual funds compared with $817 billion in ETFs. That’s right. Three-to-one for the high-MER, taxable trailer funds, low-liquidity, performance auto and high-maintenance spouse gang.

You can do better.

About the picture: “This is Nala, our daughter’s beautiful Golden from Ottawa, visiting nana and gramps in Montreal Ouest,” writes Wayne. “Nala loves long walks, as long as you bring the ‘treats’ bag; which she stops for every 10 paces. Very chill disposition except when a rabbit enters her garden domain. Then watch out bunny rabbit; this chill Golden turns into a speedy Border Collie. Love your writing style, Garth. Who needs books; a daily dose of Garth will do?”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2026/05/29/trailer-hitch/