Investors Group
Review of Segment Operating Results

Operating Expenses

Investors Group incurs commission expense in connection with the distribution of its financial services and products, particularly its mutual funds. Commissions are paid on the sale of these products and will fluctuate with the level of sales. Commission expense was $108.8 million in 2004, an increase of $27.6 million from $81.2 million in 2003. The increase in commission expense was related to:

• Increase in amortization of commissions totaling $19.1 million in 2004 related to prior year sales. This increase reflects the impact from the change in estimate, effective April 1, 2001, which increased the term of amortization on sales commissions to 72 months.
• Increase in amortization of commissions of $3.3 million related to higher commission payments in 2004 compared with 2003. The increase in commission payments results from both higher mutual fund sales and an increase in commission rates introduced in 2003 as part of Investors Group’s realignment of its Consultant compensation.
• Increases in other compensation related to mutual fund operations, insurance, mortgage and banking products.

In 2004, asset retention bonus (ARB) and asset retention premium (ARP) expenses were comprised of the following:

• Regular ARB which is paid monthly and is based on the month-end value of assets under management. As part of Investors Group’s realignment of its Consultant compensation in 2003, increases to the ARB rate paid to Consultants were introduced. Regular ARB expense increased by $28.7 million in 2004 as a result of both the increase in assets under management and the increase in the ARB rate paid to Consultants.
• Asset retention premium (ARP) which is a deferred component of compensation designed to promote Consultant retention. The ARP, which was announced in 2003, and is also based on the level of assets under management, was effective beginning in 2004 and totalled $16.4 million in 2004.

Non-commission expenses include: costs incurred by Investors Group in the support of its Consultant network; the administration, marketing and management of its mutual funds and other products; as well as all other expenses in the operation of its business.

Non-commission expense totalled $273.8 million in 2004 compared with $239.3 million in 2003, an increase of $34.5 million or 14.4%. Increases in expenses were primarily due to:

• Unitholder compensation of $28.8 million recorded in the fourth quarter of 2004 as discussed earlier.
• Increases in expenses related to the administration of Investors Group’s mutual funds due to increased transactional volumes.
• The amortization of capital expenditures and post conversion activity costs, both of which were related to the single shareholder system. Investors Group and Mackenzie merged their transfer agency and unitholder record keeping systems into one shareholder system in November 2003, preserving the integrity and privacy of their respective client bases.
• Increases in sub-advisory fees as a result of increases in these assets under management.
• Increases in Consultant network support costs as a result of increased numbers of Consultants and increased activity levels.

Non-commission expense of $273.8 million in 2004 also includes a reduction of $3.7 million recorded in the third quarter of 2004 which represents a portion of the general allowance for credit losses. This reduction of a portion of the general allowance results from the periodic review of the credit quality of Investors Group’s mortgage portfolio and the adequacy of the related general allowance and reflects changes in the size and composition of portfolios, improving default and loss trends and continued improvement in underwriting and default management policies and processes.

Investors Group continues to benefit from the impact of synergies related to the transition work completed with Mackenzie. In addition, management continues to focus on both control of discretionary expenses and expense reductions beyond the opportunities created by the transition activities.