Hey there, time traveller!
This article was published 13/10/2011 (3504 days ago), so information in it may no longer be current.
In Canada, we have been accustomed for years to paying more for the same items than Americans.
But paying two and a half times as much for mutual funds? There must be something wrong there.
And there is something wrong, when Morningstar.ca recently concluded that the average fund Management Expense Ratio (MER) in the United States is 0.94 per cent per year, while the average cost in Canada is 2.34 per cent.
There are definitely some apples-to-oranges comparisons. The main difference is that the average Canadian mutual fund charge includes a fee paid to an adviser or salesperson, which is excluded in the United States.
As well, GST and HST are applied by the government to the full management fee (and to external costs of legal and accounting expenses), all of which add to the overall cost.
Does that mean everything is fine and there is no room for improvement? Absolutely not, and that's what we'll look at today. We can certainly say that funds that produce poor results are overpriced, but we would also have to say that funds that beat their benchmark are a bargain.
Mutual funds are also compared regularly to ETFs (exchange traded funds) and other investment vehicles. Fund costs are much higher, again for some of the same reasons.
Mutual funds are a popular, useful and practical way to invest indirectly in securities ranging from government treasury bills, bonds, mortgages, preferred shares, and equity shares of publicly traded companies. For most small investors, buying such securities directly is simply not practical. Costs are high for small investment amounts, and many investors lack the time, interest or skills to do it well on their own.
For these people, funds offer a convenient and practical way to start investing, some with as little as $100 a month. Fund dealers will provide advice from a licensed salesperson, even starting at these small amounts.
In my opinion, at any level of total portfolio value under, say, $100,000, a mutual fund investor who is getting real financial planning advice from a capable adviser included in the cost, is getting a bargain, both on the fund costs and on the advice costs. Small investors are subsidized by larger ones, plain and simple.
Do-it-yourself investors can reduce their costs, and I encourage all investors to become informed about their options. But, as in any sport, a lot of players do better with some coaching and supervision.
The fact remains, however, that the choice is yours. A group called FAIR Canada (Canadian Foundation for Advancement of Investor Rights) recently wrote to the minister of finance about fund fees, and he has directed the Senate finance committee to investigate. I hope they will comment fairly on the role of GST and HST on costs, as they dissect the other factors.
Affluent investors have a lot more choices. Even staying in the mutual fund industry, investors who can muster up $10,000 to invest can go to direct-sale fund companies like Steadyhand for lower fees. A few conventional fund companies like Standard Life have reduced fees at the $100,000 and $250,000 level, to more accurately reflect the costs of administering each account.
Another thing I believe is that investors will do better with good advice than no advice.
Having said that, there is not a week that goes by when I don't see another example of an "adviser" who is just a great salesperson, and therefore able to sell an investor on paying way too much, while providing little. And that irks me. They are able to use funds or other products with imbedded commissions to pad their wallets.
If you are getting little or no advice, or poor advice, first evaluate what you are actually paying your adviser. If it's a lot, then vote with your feet and your wallet.
"Unbundling" the advice from the mutual fund MER is available at fund dealers through "F" class funds now, and at investment dealers with fee-based accounts. These provide more transparency, and let you know what you are paying for the "advice" and service component, and how much for the actual investment management of the fund.
I have a lot of beefs with the mutual fund industry, and I think a precious few fund companies consistently provide the value for which we are paying them. Many have become marketing companies and not investment companies any more.
But when we criticize the industry (as I do often), let's do it for the right reasons, and get our facts straight.
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a Portfolio Manager (Restricted).
Personal finance columnist
David has been a practising financial planner and life advisor since 1982, specializing in helping clients identify and reach their most important goals, and then helping them manage all of their financial affairs, including investments.