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.”
