Chilton, Lang And O’Leary On Mutual Fund Costs

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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  1. Joe on January 21, 2013 at 12:44 am

    Given his professed lack of concern for anything other than money, I’m not surprised O’Leary (whose advice you should make you o’leery) would hypocritically use his soapbox (given to him by the CBC with the intention of denigrating all Conservatives as crass, ignorant neo-liberals) to criticize MERs. Just look at the lackluster performance of his mutual funds and their stunningly high MERs. Not surprised, but disgusted.

    • Echo on January 21, 2013 at 12:51 am

      @Joe – Well, it was Chilton who was hammering the industry on high MERs in Canada and O’Leary was doing a poor job skirting around the issues (blaming smaller scale, compared to US funds, for our higher fees).

      I couldn’t dig up much on O’Leary Funds, but found a few references to 1.5% MER plus up to 0.4% on most funds. Their track record, well that’s another story.

  2. Canadian Dividend Blogger on January 21, 2013 at 1:01 am

    Kevin O’Leary does make a good point, that there isn’t a lot out there in terms of ETFs for people looking for income in the Canadian market. CDZ is not really that great in that it hasn’t been providing steady or increasing yield; distributions are down more than 10% since 2010, although total return is positive and there are capital gains. But just looking at the top two holdings of the fund makes me shudder (AGF and Atlantic Power). Not that mutual funds are any better.

    • Echo on January 21, 2013 at 8:59 am

      @doctrine – Agreed, but CDZ is certainly a better option than a bank dividend fund where the fees are as much as the yield.

      But, as you’ve pointed out, CDZ has it’s flaws and so that’s why I prefer to own many Canadian dividend growth stocks outright.

      • Jane Savers@ The Money Puzzle on January 21, 2013 at 6:00 pm

        I have my own collection of stocks but I am considering Vanguard ETF (on the TSX) because I have heard Suze Orman mention it so many times.

        Now I am not so sure.

  3. My Own Advisor on January 21, 2013 at 6:59 am

    Good post.

    Good video.

    Any money you pay in fees is the money you don’t keep for yourself.

    I would never own an O’Leary fund!

  4. Financial Planning Guy on January 21, 2013 at 12:10 pm

    Hey B&E,

    Before I delve into this, just to be clear I’m not here to defend the high cost of Canadian mutual funds. There are significant changes in the industry that most aren’t aware of where you can get drastically lower fees on actively managed funds. But still for the vast majority of retail consumers they are pretty high and need to come down drastically.

    I couple things I think should be cleared up. All returns on mutual funds, yield’s included, are net of fees. It is a little misleading to say that TD’s Dividend Income fund yields 2% and charges a 2% fee implying a 0% return. It is yielding 2% net of fees (I might be splitting hairs).

    Also, the front end and dsc fees probably shouldn’t be classified as hidden fees. Front end fees are actually used mostly by fee only advisors as a way of valuing their business. They are available widely in the retail world but not used very often. When you look at the Morningstar report of the different countries and their disclosure, Canada actually ranks in the highest group in transparency of fees, sales practices and media. If you think it’s bad here with hidden fees, I would hate to see what Taiwan China and Spain look like.

    One final thing. There are widely available non-registered tax efficient mutual funds in Canada that most are not aware, don’t understand or don’t take advantage of. The Corporate Class mutual funds available from most fund companies can defer taxes until withdrawal, and even give a stream of tax efficient income that can mean you can essentially defer taxes on your non-registered investments to your estate. Most however are too familiar with the traditional Trust structure of mutual funds that kick out taxation on an annual basis and never look into other options.

    My 2 cents fwiw.


    • Echo on January 21, 2013 at 12:19 pm

      @FPG – Thanks for your comments. I didn’t imply 0% returns on the TD Dividend Income Fund, just that the MER and the Yield were identical. On the other hand, a dividend ETF like CDZ yields nearly 3% more than its MER.

      Fair point on the hidden fees. In the video, Chilton says the hidden fees are more related to taxation issues and bid-ask spreads.

      The bottom line is that the average investor can do much better with low cost index funds and ETFs rather than trying to identify in advance the actively managed mutual funds that will beat the market going forward.

  5. Money Dave on January 27, 2013 at 9:11 pm

    Great post. I wish I had something new to add, but the other commentors have done a great job already. I appreciated Financial Planning Guy’s reply.

  6. Victor Olabati on April 19, 2013 at 8:59 pm

    Kevin is Canadian, and I think he brings a lot fight, spirit and entrepreneurship to our landscape.

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