A collective groan emanated across Canada when advisors outside of B.C. and Ontario found out that their clients would have to pay HST on their investment funds. However, when three fund companies — Dynamic, Brandes Investment Partners and EdgePoint Wealth — announced they would introduce non-HST series funds in July, those groans didn’t necessarily turn into cheers.
Jerry Zakariasen, president of Edmonton-based Lifetrek Financial Group, welcomes the funds — he’s happy his clients won’t have to pay an additional 8% tax (it’s worked into MERs) — but he’s conflicted over the news.
“I have mixed feelings,” he says “I’m getting frustrated by the increasing complexity we have to deal with all the time.”
While he thinks all fund companies should offer an HST exempt option, he wonders what the financial and administrative costs will be to investors and advisors, and which funds will get an additional series. “They’re not going to do it with all the funds,” he says, adding that he expects 20% of funds — the more popular ones — will have a get the new series treatment.
Kevin MacLeod, a CFP with Moneyadvisor.ca Financial, is also cautiously optimistic. Another series means more codes for the same fund and “that’s going to be confusing,” he says.
Still, he’s glad the companies are offering the choice. But before he can jump for joy, he needs to know that it won’t be an administrative nightmare. “Hopefully that admin is born by the fund companies,” he says.
According to Daniel Solomon, vice-president of BMO Nesbit Burns’ investment funds research portfolio, action and research team, advisors were initially excited about the prospect of non-HST funds. Now that some time has passed since it’s been announced, advisors are getting nervous. He says they’re wondering if the HST exempt series’ will actually be cheaper.
“You could have one series for each province and then it becomes counter productive,” he says. “It could come to a point where it makes no sense, because the cost will outweigh the benefit.”
The only way it will work, says Solomon, is if enough people invest in the fund. He explains that management fees cover things like regulatory requirements, performance monitoring, reporting costs and other day-to-day expenses. If there are only a handful of clients in a fund, operating costs per investor will be too high.
“The worst possible outcome would be for a non-HST fund becoming more expensive than an HST fund,” he says.
Even if the funds are identical, besides the HST costs, it’s still expensive for a fund company to get a new series up and running. And investors in the existing funds, says Solomon, shouldn’t bear that cost. That could limit the HST exempt options.
When it comes to switching clients to the new funds, Solomon expects that all the companies will make it a seamless transition. Brandes has already said that it would automatically switch its non-HST paying investors into its new series of funds. The company also says it will absorb any related expenses and cover the cost of tax increases incurred on two of its high-net worth classes.
Still, Zakariasen expects some headaches. But he’d rather be frustrated than let his clients pay higher MERs. “The extra work is not a deal breaker,” he says. “The amount they save may not be enormous, but it’s not insignificant either. My clients would rather invest that money or keep it for themselves.”
(08/16/10)