When attempting to determine the costs (fees and expenses) associated with buying and holding capital and preferred shares of a Split-Share corporation, your best source of information is the issue's prospectus. The prospectus will list all of the costs associated with each investment. Below is a list and brief description of the most common fees and expenses incurred with capital and preferred shares. When discussing the fees and expenses, we find it useful to use the actual fees and expenses incurred in an existing real Split-Share issue.
Note: In our discussion of the costs, we will highlight certain costs by relating it to the costs associated with the capital and preferred shares issued by S-Split Corporation, issued May 17, 2007. The structure and purpose of the S-Split Corporation was to invest in the common shares of the Bank of Nova Scotia. This S-Split Corporation has a termination date of December 1, 2014. On this date, the Bank of Nova Scotia common shares held by S-Split Corporation will be sold and the proceeds distributed to the capital and preferred shareholders.
- Retraction Fees: Most Capital and Preferred shares offer holders the option to retract or sell their shares back to the corporation prior to the termination Date. There are often a number of conditions, restrictions and costs associated with this feature. Retraction fees are usually payable to the investment manager and are on a sliding scale, similar to Deferred Sales Charges (DSC) on mutual funds. The retraction can be as high as 5.5% and eventually decline to 0.0% up to the Termination Date.
- Selling/Agent’s Fees: These are fees payable to the selling agents – brokers, financial advisors, discount brokers, etc., for distributing the units to investors. For example, the selling fees for the S-Split Corp. units averaged $1.125, or 4.50%, of the $25.00 per unit issue price.
- Manager’s Fees: These are the ongoing fees paid to the Split-Share Corporation’s manager. They are typically changed each year. For example, the S-Split Corp. Manager’s fee is 0.10%, annually, of the corporation’s net asset value (NAV) calculated and payable monthly, plus applicable taxes.
- Investment Manager’s Fee: Is a fee payable to the entity that actually manages the portfolio of common shares. The managing entity may be different than the Split-Share Corporation's manager. (One does have to wonder about paying someone each year to buy a share, hold it for five years, and then sell it.) In the case of the S-Split Share, the Investment Manager is paid a fee at an annual rate of 1.55% of the company’s NAV calculated and payable monthly, plus applicable taxes.
- Service Fees: This is an on-going fee paid to all of the Dealers and the Dealers' representatives whose clients hold the capital and preferred shares. The fee can be paid for both preferred and capital shares or just capital shares, as it is with the S-Split Shares. The service fee for the S-Split Share was calculated and paid at the end of each calendar quarter and it is equal to 0.50% annually of the value of the Class A shares held by clients of the dealer.
The fees for the S-Split Corp Shares would be $1.125, per $25.00 unit for the selling agent. Then each year, assuming the unit’s value remains at $25.00, would be $0.025 for the Manager, $0.3875 for the Investment Manager and $0.05 for the servicing agent. This would be a total annual fee of approximately $0.4625 , or 1.85%.
The costs to own these structured investments can be quite high and investors should make every attempt to define and understand the costs before investing their savings.