What are the fees and expenses associated with PPNs?

The total cost of a PPN’s structure is not fully itemized in the Information Statement. Selling commissions are always disclosed and these can range from 1.75% to 3.50%. But there are a number of one-time and ongoing fees that can be part of the PPN’s structure.

According to the Canadian Securities Administrators (CSA), the costs of PPNs amount to the following:

PPN managers decide the amount and kind of fees to charge. Types of fees that some PPN managers charge are:

a)    Selling Commissions

b)   Management Fees

c)    Performance Fees

d)    Structuring Fees

e)    Operating Fees

f)      Trailer Fees

g)    Early Redemption fees and

h)    Swap Arrangement Fees

It is more important to understand how much of your investment is used to pay fees than it is to understand what each fee means. The payment of these fees can decrease the variable return earned on the PPN. If the total fees on your investment are substantial, you risk making less on your investment than expected.

Example:  Keep in mind that if you invest $100.00 and the actual initial fees are 5.5%, the actual capital invested in the structure will be $94.50, not $100.00. This lower net initial investment will negatively impact the variable return, making it difficult to achieve the Back-Tested positive outcomes published in the PPN Information Statement.

Some issuing institutions have begun to offset the initial negative impact of fees by paying the fees upfront and not from the investor’s initial investment. The issuer then reimburses themselves from the annual fees and Early Redemption Fees charged. This evolution in fee structure is the exact same restructuring of fees that the mutual fund industry underwent when investors objected to the reduced initial capital investment that resulted from Front-end Load fees. The mutual fund industry introduced the now well-established Deferred Sales Charge fee structure that exists today. The reasoning for the new Early Redemption Fee structure is identical – think long-term, Buy and Hold.

Unfortunately, there is no requirement for PPN issuers to itemize all of the fees imposed.

Buyer beware:

  • Investors should keep in mind that the more mouths your money must feed the less there will be left for you.
  • In the investing world there is an accepted rule-of-thumb that states the rate of return earned from a risk-free investment should approximate the rate of return earned from a government guaranteed investment. Therefore, if a 5-year government bond promises an annual rate of return equal to 2.50%, then a risk-free PPN’s return should approximate the same – before fees.

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