[A financial advisor, who wishes to remain anonymous, sent the following e-mail on reading my post on Cymbria. I'm publishing it with permission to present the other side of the story.]

I don’t know if I share the rosy feelings on Cymbria (TSX: CYB) that some advisors and media might. To best explain, let us look at this deal by playing devil’s advocate. According to an inside source, the Cymbria deal was peddled to advisors behind the scenes as a way to make money (once again) for advisors at the expense of investors. How? Advisors who bought into the offering, get a 3% selling concession, plus getting 1% trailer for seven years thereafter (and getting low cost management of 1% after that) and now they have an incentive to sell Edgepoint funds to their clients: they get traditional compensation and get to participate the in the profit of the manufacturer (Edgepoint Wealth).

The terms of the Class A shares (editor’s note: these were offered to the public) was a service fee (trailer) of 1% for the first 7 years.

The management fee was 0% for the first three years, 0.75% for the next 4 and then 1% thereafter.

This means that the subscribers (advisors) pocket 10% in commissions for the first 7 years (3% up front and 1% for 7 years), and then get a fund managed for 1% thereafter. I don’t know if the fund planned to borrow money to fund the commissions or if the subscribers are essentially paying themselves out of the NAV, but it looks like it was setup so that if they bought it themselves, they are not out any real money, but if they sold to clients they get fat commissions.

My guess is that they bought it for themselves, not focusing on the commissions, but rather on the equity in Edgepoint Wealth, which they now have an incentive to peddle with vigour (commissions PLUS profit sharing? This is a bit much don’t you think?). The fees on the retail open-ended funds (i.e. EdgePoint Mutual funds) are not low. Look at the annual report for the Canadian fund: before management absorption, MER was 15.77%. After absorption, it was still 3.01% (looking at the low load shares). Trading costs were a further 5.04%, giving a TER of 8.05%.

Now a new fund is going to have high expenses and anomalously higher MERs for the first few years, especially since there was something like only a few million in the fund. But, as the MER approaches the management fee, it can still not get below 2% and more likely will settle into the 2.2% range once they get scale.

The low turnover rate of 1.79% is meaningless in the first few years as well since portfolio turnover is based on the lesser of buys or sells of securities divided by total assets. I do know many large advisor teams bought into Cymbria and now are selling EdgePoint funds. I just don’t know how many offered their clients the same deal.