I came across an interesting video on CBC News featuring David Chilton, Amanda Lang and Kevin O’Leary.  They were discussing the high costs of Canadian mutual funds, as well as some of the pitfalls to avoid when using ETFs.  It’s just over a year old, but well worth a look.

Highest Mutual Fund Costs

It starts off saying that Canada has the highest mutual fund costs of the 22 countries studied in a recent Morningstar report, meaning we’re paying more to invest our money than anyone else.  We pay a median price of 2.31% for equity mutual funds, compared to 0.94% in the U.S.

Related: Mutual Fund Fees – The High Cost Of Canadian Funds

Fees matter.  Paying an extra one or two per cent per year in costs can take a huge bite out of your investment returns.  Consider this example of a $10,000 investment:

  • With a 0.5% fee on $10,000 invested over 45 years, your money manager will make nearly $18,000 while the investor makes $72,000.
  • With a 2.5% fee on $10,000 invested over 45 years, your money manager will make over $60,000 while the investor makes less than $30,000.

Chilton says the problem is the fees are embedded inside the mutual fund and so we don’t even notice them.  It doesn’t feel like a lot of money because it’s not like we’re writing a cheque to our advisor every year.

Related: Fee Only Financial Planner vs. Commission Based Advisor

He says the bottom line is Canadian investors were unaware of fees for some time and we’ve become tolerant of mutual fund costs that are too high.

When stocks markets were soaring in the 80’s and 90’s, this wasn’t a problem.  But investors have started to wake up over the last decade as the markets have struggled and lower cost products like index funds and ETFs have emerged.

There’s pressure on the mutual fund industry to bring fees down.  Investors Group, known for selling high MER products, reduced management fees on two-thirds of its mutual funds in 2012.

ETFs: The Good And Bad

The discussion turns to ETFs and Chilton describes how broad market index ETFs are good because their costs are just a fraction of most equity mutual funds. The problem, he says, is that over the last 5 years ETFs have gotten so niche-oriented and many of these products are not suited to the average investor.

Related: Why A Fiduciary Standard Is Needed In Canada

Kevin O’Leary brings up the point that many seniors are looking for income and most ETFs, particularly broad market ETFs, don’t offer much for yield.  He says that since Income Trusts have been dissolved and corporate bonds are paying less than 4 per cent, the average Canadian senior can’t live off their investment income anymore.

Chilton argues that you can still look for ETFs that emphasize dividends, like CDZ which tracks the Canadian Dividend Aristocrats Index.  This dividend ETF has a 0.67% MER and the yield is 3.62%.  But hunting for higher yield north of 4% is going to come with additional risk.

Hidden Fees

A dividend mutual fund, on the other hand, can cost you as much in fees as you’re getting in yield.  Indeed, TD’s Dividend Income Fund pays 2.02% yield and comes with a 2.02% MER.

Another problem in Canada is the management expense ratio (MER) doesn’t capture all the fees.  There are deferred sales charges and front-end loads, not to mention tax inefficiencies when holding funds in a non-registered account.

Related: How Index Funds Compare To Equity Mutual Funds

Chilton goes off about some Canadian mutual funds charging up to 3%, which he calls outrageous and down right nutty.  O’Leary, whose own branded mutual funds charge up to 1.9%, says 3% is an outlier and that Canada’s a free market and we’ve accepted higher costs.

Bottom Line

Hopefully Chilton is right and Canadian investors are waking up to the fact that we’re paying some of the highest mutual fund costs in the world.  The more we can shift our investments towards lower cost index funds and ETFs, the more pressure the investment industry will be under to lower its costs.

When it comes to investing your money, high investment costs are your real enemy.  The more you allow the financial industry to take, the less you’ll have in retirement.

Related: Avoid These 4 Investing Mistakes

These are really important lessons for investors.  Here’s the full nine minute video – enjoy!

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