My Advice To Switch Out Of Mutual Funds Draws Ire Of Industry Group

In a recent Toronto Star column, I wrote that mutual fund fees in Canada are some of the highest in the world and because of these fees the vast majority of actively-managed funds lag behind the market.  I said that switching to low-cost index mutual funds or ETFs will cut your investment fees to the bone while likely increasing your overall returns.

Joanne De Laurentiis, President of the Investment Funds Institute of Canada (IFIC), a mutual fund lobbyist group, apparently took issue with my column.  She wrote in a letter to the editor that my advice to switch out of mutual funds was superficial and misguided.

Engen’s suggestion that Canadian mutual fund fees are among the highest in the world is simplistic at best.  In the U.S., the majority of investors pay an additional fee over and above the U.S. version of the management expense ratio (MER) for their advisors’ services; whereas in Canada, all costs are included in the MER.

Canadian Mutual Funds: Highest fees in the world

I didn’t just pull that argument out of thin air.  Back in 2011, Morningstar issued a report that compared total expenses of funds available to investors in 22 countries and found that Canadian fees were the highest for equity mutual funds and third highest for fixed-income funds and tied for highest for money-market funds.

The IFIC tried to pass off the Morningstar report as an “apples to oranges” comparison of fees around the world. De Laurentiis continued:

Recent research that took into account the different pricing models concluded that on a tax-adjusted basis (no HST in the U.S.), the asset-weighted cost (2.02 per cent) of owning mutual funds in Canada is virtually the same as the average cost (2 per cent) for a typical investor using an adviser in the U.S.

But things still hadn’t improved by the time Morningstar released its 2013 report.  The report also offered a rebuttal to some of the earlier claims made by IFIC.

“Morningstar still doesn’t buy the “apples vs. oranges” excuse, finding that with “rare exceptions,” mutual funds in every country pay for distribution costs out of their funds’ expense ratios,” wrote Jonathan Chevreau in a Financial Post column.

According to the report, Canada does well across the board but is hampered by having the world’s highest total expense ratios.  Morningstar found that Canadian fund investors pay up to 0.50% more in annual fund expenses per year than do investors in fund markets of a similar size elsewhere in the world.

Related: Chilton, Lang and O’Leary on Mutual Fund Costs

The value of advice

But De Laurentiis didn’t stop there.  She claims that households who work with an advisor (assuming your mutual fund salesperson is also giving advice) end up richer than households who go it alone:

Reducing investment fees by buying products without the benefit of advice does not automatically translate into higher returns.  All credible research shows that having an adviser creates a savings discipline and thereby produces superior financial results for the investor — more than 2.5 times more financial assets than households that do not receive advice.  This is after all costs have been taken into account.

She’s referring to the CIRANO study, a research paper on the value of advice from a financial advisor. The study claimed that on average, participants retaining the service of a financial advisor for more than 15 years have about 173 per cent more financial assets than non-advised respondents.

Preet Banerjee examined the study in a Globe and Mail column and said it was a mistake for industry groups like IFIC to take the research as gospel.

“I spoke with Professor Claude Montmarquette, president and CEO of CIRANO and one of the authors of the study, and he indicated that the study is absolutely refutable given the limitations of the data,” wrote Banerjee.

Canadian Couch Potato blogger Dan Bortolotti said the IFIC and other industry spokespeople have been making the same claims forever.

“Even if you accept their “research” (which is inevitably commissioned by the industry), it doesn’t make a very compelling value proposition,” said Bortolotti in an email.

“They seem to have concluded that because wealthy people use advisors and poorer people do not, the advisors must be responsible for the difference in net worth.  Talk about confusing correlation with causation.  You may as well conclude that driving a Mercedes makes you rich.”

Final thoughts

It’s no surprise that the mutual fund industry and its lobby groups will fight tooth and nail to protect their nearly $1 trillion in managed assets (and associated fees).

It’s appropriate to end with this famous Upton Sinclair quote, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.

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  1. Robert Britton on January 20, 2014 at 5:33 am

    If I had committed much of my asset value to mutual funds over the years, my friends would describe me in a way they now cannot: “still working”.

    May I add that there are also trust units out there that pool money in a similar way to mutuals but with far lower fees.

    I have to admit that I tend to prefer direct ownership of securities, but for pooled instruments I think it’s great that you are getting people to rethink mutual funds.

  2. Ed on January 20, 2014 at 7:53 am

    That is a well constructed argument. It is shameful that the truth be stretched to achieve a goal.

  3. Michael on January 20, 2014 at 8:10 am

    Funny, the argument that cutting fees will increase returns (to me) isn’t much of an argument – it’s simple math. It’s been proven over and over again that paying high MERs of 2% (or more) leads to lower overall returns. I can see why they would want to protect their industry though, if word got out just how high the fees are in the long run they would see a significant decrease in their business.

    In my own personal experiences I have met a few individuals with a high net worth and not one of them has any money invested in mutual funds.

    This is very similar to realtors wanted to protect their monopoly on the MLS system. Private listings finally fought their way through and prevailed which resulted in a more competitive and open market but it took years and was frustrating for many

    Great quote at the end – very fitting!

  4. Bernie on January 20, 2014 at 9:15 am

    “In a recent Toronto Star column, I wrote that mutual fund fees in Canada are some of the highest in the world and because of these fees the vast majority of actively-managed funds lag behind the market. I said that switching to low-cost index mutual funds or ETFs will cut your investment fees to the bone while likely increasing your overall returns.”

    The trouble with your statement that might ruffle a lot of feathers is that it appears to be a blanket statement that maligns “all” Canadian mutual funds while assuming lower MER will increase your returns. While this may be true with the average Canadian mutual fund compared to the average Canadian index fund there are actually quite a few managed mutual funds in Canada that regularly beat index fund performances, even with their higher MERS factored in.

    • Don on January 20, 2014 at 10:29 pm

      Can you define quite a few? Chuck Jaffe of MarketWatch pointed out that only 8 funds beat the S&P 500 over a ten-year period.

      This was a bit over 2 years ago, but I would doubt that this has changed much.

      • Bernie on January 21, 2014 at 12:38 am


        Your linked article made mention of 8 U.S. listed funds that beat the market (S&P500) every year of the past 10 years. I find it remarkable that any one fund or stock could beat the market every year! It would be more realistic to list funds that beat the index most years or on average.

        It would take an enormous amount of work to look at every single mutual fund in Canada to see how it compares to the index it relates to. I decided to use’s mutual fund screening tool to get some performance numbers for Canadian Equity mutual finds and then compare these results to the Canadian index numbers for 5 & 10 year periods.

        According to Morningstar there are 16,890 Canadian Equity mutual funds. The number of funds that existed 5 & 10 years ago were not immediately available. The screening results did show that a total of 793 funds beat the index annualized rate of 6.07% over 10 years and that a total of 1073 funds beat the index annualized rate of 13.08% over 5 years.

        The numbers of outperformers really surprised me. When I said “a lot” earlier I honestly thought maybe 50 or less not several hundred!

        Personally, I only hold one mutual fund in my non-registered account and one in my TFSA. I used to hold nothing but mutual funds in the first 15 years of my investment life. I evolved into a stock dividend growth investor and have done quite well over the years. I hold approx. 95% equities and have doubled the couch potato index performance of the past 5 years. I prefer my DIY “hands on” approach and find it very rewarding!

        • Echo on January 21, 2014 at 8:15 am

          @Bernie – that’s still less than 5% of funds that beat the index over a decade and even less if you count the funds that have been closed down or repackaged (survivorship bias).

          I think a blanket statement is appropriate when it holds true 95 times out of 100, and when there is no way to determine in advance which 5 funds will beat the market.

          • Bernie on January 21, 2014 at 9:25 am


            I am in no way advocating mutual funds but I find that most of the “the 5% that beat the market on average” tend to be the same funds. Theses top performers also tend to not only beat the market but “smoke” it. Remember, the market or index is really an average of all the stocks within it.

            Most people don’t have the knowledge or want to be involved with the day to day maintenance of their investments. By far the easiest and cheapest means for these individuals to get average markets returns would be buying low cost index funds. However, if they want a good chance of beating these kind of returns they could go one step further and seek out those perennial outperforming funds.

        • Don on January 22, 2014 at 3:25 pm

          I tend to use the US funds, as the information is much easier to obtain. However, I would go with the funds that beat every year because many funds that beat are specialized funds that do well when their area of specialization does well, but can fall hard when it doesn’t.

          As you have the stats, can you let me know how many of those were precious metal or other commodity funds? I think you’ll find that the rate of return will change after the commodity crash we had last year.

          • Bernie on January 22, 2014 at 4:04 pm

            Those were strictly in Canadian Equity category. I don’t know for sure but I assume other categories would have similar percentage outperformers. My preference for mutuals are the small cap funds.

    • Grant on January 21, 2014 at 3:05 pm

      The trouble is that past performance is no guarantee off future performance, and funds that performed well in the last 5 years, usually under perform in the next 5 years.

  5. Grant on January 20, 2014 at 10:21 am

    Many people buy their mutual funds from the banks. Bank employees are simply mutual fund peddlars who usually have minimal knowledge of investing and are paid to push mutual funds.

    The only way solve this problem is that anyone who manages other peoples money, or gives specific financial advice, should be required to offer a fiduciary standard of care (the management or advice must be “in the best interests of” instead of just “suitable for” the client) and provide an annual customized portfolio review against appropriate benchmarks. This would expose the damage these mutual funds are doing.

  6. CanTex on January 20, 2014 at 1:08 pm

    We’re ex-pats with investments in Canada (old RRSPs) and the US. Almost all of our investments are in index funds, with MERs as low as 0.07%, all doing very well, thank you very much.

    I still have vivid memories of an RBC “manager” insisting that paying 2%+ MERs was the wisest thing to do since index funds were clearly useless. What? No! Look up Scott Burns at, part of , and search for articles on index funds outperforming 70% to 80% of the time, year after year. Sure, there are funds that outperform the index. This year. But what about next year? Another fund replaces it on the hot list. But the index just keeps rolling along. Boring, couch potato stuff. But it works.

    Contrary to what some folks would have you believe, no one has THE magic formula to beat the market on a regular basis. If there was such a formula everybody would be doing it. Market forces simply would not allow everybody to beat the market. Think about it.

    • Don on January 20, 2014 at 10:41 pm

      Except for Buffet who just failed, after 44 years, to beat the S&P 500 over a five-year time period. Of course, he doesn’t run a mutual fund. 😉

      • CanTex on January 21, 2014 at 5:39 am

        Yeah, even the Oracle of Omaha’s magic formula doesn’t work all the time. But index funds just keep rolling along.

        • Grant on January 21, 2014 at 2:56 pm

          Yes, but over the long term (44 years) he has beaten the market. He is one of the tiny number of people who have beaten the market for longer than about 20 years.

          Buffet’s poor recent performance is likely due to large size of Berkshire Hathaway. He always holds a significant amount of cash relative to the market cap of Berkshire because the company generates so much cash and also needs to keep enough cash on hand to make the large acquisitions it needs to make in order that they generate enough return to make an impact. Small acquisitions (ie under about $5B) do not move the needle much for Berkshire.

          • Bernie on January 21, 2014 at 6:22 pm

            Over the long term Mr. Buffett has beaten the market by 2 1/2 times per annum.

          • CanTex on January 21, 2014 at 6:56 pm

            Warren, of course, has somewhat of an influence over each of Berkshire’s companies and the management thereof. Also, most of his companies are on the dull, boring, conservative side. They just keep rolling along, like index funds. The man is a genius about managements,figuring out the best plan for each company, putting the right people in place to run them, and keeping on top of each one. Personal control, something mutual fund managers don’t have. Good for Warren, more power to him.

  7. Don on January 20, 2014 at 10:38 pm

    You should be flattered.

    The fact you received a response from the head of the industry spokes group means that you really struck a nerve, and for a good reason. The industry is now worth over $900 billion, but if the US market is any indication ETF index funds are going to start eating their lunch.

  8. CanadianInvestor on January 21, 2014 at 3:50 am

    Funny, but I don’t have an “advisor” (or adviser, for that matter), I invest only in ETFs and some stocks and bonds and I’m doing quite well, thank you. I think my savings discipline is mostly innate and not determined from outside. But …when will God let me eat the damn cookie?

  9. Money Saving on January 21, 2014 at 7:25 am

    I’ve gone the way of the ETF and have been pleased so far. I think you were spot on when you called a spade a spade!

  10. Robert on January 21, 2014 at 8:03 am

    When advertising, the mutual fund people add a subdued caveat that past results mean nothing about the future performance. That is true of any other method’s past successes also.

    However, they do not advertise that past absurdly high fees they have charged are an absolute guaranty of them doing the same to you in the future.

  11. Dan Hallett on January 21, 2014 at 8:25 am

    Ken Kivenko pointed me to this blog post. Interesting read and feedback so far. For background, I am a licensed Portfolio Manager. While I’m personally interested in the mutual fund industry, it’s not really relevant to our business today.

    I would say that IFIC’s position is at least half-right. The notion that Canada’s fees are high is not debatable. However, Canada’s dubious top position as the home of the costliest mutual fund industry is questionable at best. It’s reasonable for you to accept Morningstar’s report without question, but as I dug into this report, it became clear that its figures are not as comparable as I’d initially hoped. For more info see this article:

    But there’s a larger question about the importance of average fee statistics. The next article linked below points out that if DIY investors have access to cheap active funds, cheap index funds and North American ETFs does it matter that we happen to have a bunch of other more expensive funds? I don’t think so but as the first article I linked points out, people (particularly DIYs) have to stop buying the expensive stuff.

    • Echo on January 21, 2014 at 10:37 am

      @Dan – Thanks for dropping by! Yes, it’s true we have access to cheap index funds and ETFs for do-it-yourself investors. However, I’d say the vast majority of investors get started by visiting a bank advisor (or worse, somewhere like Investors Group or Primerica) who then steer them into the type of mutual funds that Morningstar references in their report.

      They stress to their clients the importance of regular contributions and dollar cost averaging, which enforces good, disciplined saving habits, all while funnelling 2-3% off the top.

      Advice needs to be separated from product sales.

      • Dan Hallett on January 22, 2014 at 8:43 am

        I think people starting with Investors Group or a bank is less true today. One of the ‘banks’ people may use to start investing is something like PC Financial (which offers CIBC index funds…at a 0.1% discount I think) and ING Direct (which markets its own index balanced funds). And most younger people starting will go to the internet before they walk into their branch. I don’t have any stats to support that but that’s my sense of how it’s different today.

        For most of my career, I’ve been in positions where people had to pay explicitly for my advice. So it’s a model I prefer but I’m not so sure that most Canadians will be warm to this idea. But one way or another, we need more transparency and more professionalism.

        • Bernie on January 22, 2014 at 9:55 am

          @Dan: Those are two excellent low cost options for someone just starting out!

        • Paul N on January 24, 2014 at 10:44 am

          I have to agree with Echo. The marketing machinery with Primeamerica, Edward Jones, IG, etc. still attracts a lot of people. Their practices can be dubious to say the least.

          Going to a bank is a major problem too. The person you sit with usually will direct you into the wrong funds when you are starting out. Sadly that person thinks they are serving you well because they don’t know any better.

          In various blogs over the years the case of the low cost TD index funds keeps coming up. The funds are available but it seems that when you go to the bank to purchase them firstly some staff don’t know what they are, or they try to put you into something else. In my case I could visibly see the persons demeanor change when I insisted on them. It can be a frustrating experience? Is that on purpose? To some degree it has to be.

          An inexperienced person walking in to any of the above investment possibilities is a sheep walking into a dinner party party for wolves. The investor does not know the right questions to ask, and the “adviser” may have his compensation more in mind then his duty to make the best investment choices for the client.

  12. AdinaJ on January 21, 2014 at 8:42 am

    Thanks for this rebuttal! I may have to bring a copy of this next time I see my bank “advisor”. Last time I explained I wasn’t interested in mutual funds, and she started telling me about the super duper smart people “managing” them, I don’t think my major eye roll conveyed my feelings *quite* enough. This will do a better job. That Upton Sinclair quote, in particular, is perfect. Ugh, I hate bank “advisors”!

    • CanTex on January 21, 2014 at 10:49 am

      Don’t forget, they have the magic formula and no one else does. Ha! I had to keep an even temper with my RBC rep because I needed them for other business. So it took a while for my severely-bitten tongue to heal.

      So, Echo, hang in there and don’t be intimidated by the likes of them. You should have the industry’s letter framed. What an honour to have the industry spokespeople come after you.

  13. Anne @ Unique Gifter on January 22, 2014 at 9:57 am

    Oh man. Nice rebuttal. Industry groups can be ridiculous. Sometimes I wonder if people have to sell their souls to put their names on some of the things they say.
    The point about advisers is kind of hilarious, yes, people who have worked with an adviser for 15 years likely have some money in the bank, however just because they work with an adviser does not necessarily mean they have a ton of mutual funds in their portfolio!

    • Bernie on January 22, 2014 at 10:29 am

      There are both good & bad advisors. I had an independent advisor for 9 years. My returns were roughly the same as the advisor/management fees I paid. I did much better with mutual funds I purchased myself for the 15 years pre-advisor and with dividend growth stocks for the 6 years post-advisor.

  14. My Own Advisor on January 22, 2014 at 10:01 am

    It’s all about value for money. If people feel they are getting value for money, at 2% fees over fees that are 0.2%, that’s fine.

    Personally, that’s not me.

    The industry will always try and protect itself. Survivalism really… I’m not playing that game anymore.

    Great article 🙂

    • Don on January 22, 2014 at 4:09 pm

      “It’s all about value for money. If people feel they are getting value for money, at 2% fees over fees that are 0.2%, that’s fine.”

      Good point, but I don’t think many actually know that they are paying at all, let alone that high.

      I would also like to know how they calculate their returns. I have looked at several individual’s statements that are with RBC and they aren’t anywhere near the returns I’ve seen listed. One case in point, one woman has a loss on her RBC (for 6 months) Income Fund, but the fund is claiming a gain of 1.1%. To me, that says they aren’t including the MER fee, but I’d like to hear from RBC on that.

      • Adi on August 21, 2015 at 8:27 pm

        @Don: Exactly, my TD Mutual funds is showing a gain of 1-2% in the last 1 month, 3 months, and 6 months and I’m seeing a loss in my statement

  15. Kyle @ Young and Thrifty on January 22, 2014 at 9:21 pm

    Great article, great quote at the end. Keep fighting the good fight Robb. I have the same lobbyist voices trying to muddy the waters over on our blog all of the time. In regards to that CIRANO study, it is ridiculous how you can shout, “CORRELATION IS NOT CAUSATION” over and over again and yet people who are paid not to understand refuse to register grade 9 math.

  16. MikeO3 on January 24, 2014 at 7:42 am

    Funny since I fired our advisor how my returns have increased 5 fold in the past few years. Our advisor was advising himself on how to improve his own returns irregardless of the market downturns and upswings.

    Ms. De Laurentiis says advisors help build wealth and encourage savings… Hogwash I say. Not once have any “wealth building advisors” helped us put together a finance or budgeting plan encouraging savings or wealth building outside dumping money in mutual funds. This is through at least 4 financial planners over the 30 years we have been retirement plan building.

    Someone mentioned they got rid of their advisor when the MER & fees exceeded the returns… That’s exactly what the situation was with us after years of having the fleece pulled over our eyes.

    • Kimmy on January 26, 2014 at 8:26 am

      I fired my advisor in 2011 after years of terrible returns with London Life. It was the best thing that I ever did. I love being a DIY investor and my wealth has increased substantially. I too was being fleeced. The only one making any money was my advisor!

  17. jordy on January 24, 2014 at 10:29 am

    I haven’t owned an equity mutual fund in many years. The only thing worse than mutual funds is closed-end funds and the 6.5% or whatever it is they take off the top.

    Great work Robb. Turn up the flames on the parasites.

  18. Paul N on January 24, 2014 at 11:12 am

    @ Robb

    I know I posted above, I think it was my first on your site, I also wanted to say thanks for writing an article on that subject.

    I personally have been in a struggle with the folks who run our work group P. Plan for several years. When you have a combination of greedy adviser’s, and the people in charge of the pension plan have no investing knowledge nor the desire to learn more & investigate alternatives, it becomes very frustrating.

    It took me 2 years of battling to get index funds introduced to our P. Plan. When they were finally added, they had the audacity to charge just over 1.2 % for them.

    These companies play games right to the bitter end. The reply you got is simply what one would expect them to say. They just use some standard BS lines they repeat over and over when they stand in front of you in their expensive suits. If you don’t no any better, it’s all very convincing. Please keep pushing this issue when you can.

    Writing an article like that in a paper with a broad customer base could have a lot of MF advertising dollars going to the Star. I would not be surprised if some of those fund companies would threaten them to remove their ads if articles with messages like yours get printed? It’s a fight – if I was in their position I would try that too.

    • Echo on January 24, 2014 at 11:36 am

      @Paul N – Thanks for your comments. The big banks all advertise on The Star. They all send us their latest polls and press releases and hope we write about them often. If we continuously blast them, you’re right, they might put their advertising dollars elsewhere.

      The thing is we have to be fair, compare apples to apples, and give credit where credit is due. If I rip TD for getting rid of their free seniors accounts, I’ve got to credit one of the other banks for keeping their account intact. Just like Dan said above, sure there’s a lot of junk out there but good products also exist and should be highlighted.

      But when we call out the bad behaviour and we’re honest and accurate, we don’t usually have any problems.

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