Vanguard is eying the $1.5 trillion Canadian mutual fund market and dipping its toes in with the launch of four new actively managed products. The investment giant is best known north of the border for its low cost exchange-traded funds (ETFs), but is no stranger to mutual funds, where Vanguard cut its teeth decades ago in the U.S.

The actively managed part of that announcement might have raised a few eyebrows in the investing community. One of the misconceptions about Vanguard is that it’s purely an indexing shop, but the truth is the ship that indexing pioneer Jack Bogle built has a lot of history and experience with actively managed products.

Active management gets a bad name, particularly here in Canada, but what the active versus passive investing debate truly comes down to is costs; namely low cost vs. high cost.

These new Vanguard mutual funds promise to be quite different from what we’ve seen out of any other mutual fund provider in Canada. While the majority of actively managed funds come with hefty management fees of up to 2 percent or more, Vanguard’s funds will charge no more than 50 basis points (0.50 percent).

Furthermore, their fee structure uses a performance based method called fulcrum pricing – meaning if a fund fails to meet its benchmark target then the management fee will go down. Conversely, if the fund outperforms its target then the fee will go up (fees are capped at 0.50 percent). This unique pricing aligns the interest of the investor with that of his or her advisor.

Vanguard’s four new actively managed mutual funds

The four Vanguard mutual funds are; the Vanguard Global Balanced Fund, the Vanguard Global Dividend Fund, the Vanguard U.S. Value Windsor Fund and the Vanguard International Growth Fund. All have established track records in either the U.S. or the U.K.

The Vanguard Global Balanced Fund seeks to provide long-term capital growth together with some current income by investing primarily in a combination of equity and fixed income securities of issuers located anywhere in the world.

The Vanguard Global Dividend Fund seeks to provide an above-average level of current income together with long-term capital growth by investing primarily in dividend paying equity securities of companies located anywhere around the world

The Vanguard Windsor U.S. Value Fund seeks to provide long-term capital appreciation and income by investing primarily in large- and mid-capitalization companies located in the United States whose stocks are considered to be undervalued.

The Vanguard International Growth Fund seeks to provide long-term capital appreciation by investing primarily in the stocks of companies located outside Canada and the United States.

How can investors purchase Vanguard mutual funds?

These four Vanguard mutual funds will be available as F-Series Funds, which do not include embedded commissions for advisors. That means they’re limited to investors with fee-based accounts, where investors pay a percentage of the value of their account – typically 1 to 1.5 percent – to cover the cost of advice. If you’re in this type of client-advisor relationship and interested in these products then make sure to ask your advisor about them.

The new Vanguard mutual funds will also be available through two discount brokerage platforms; Questrade and Qtrade, with the hope that more discount brokerages will add the funds to their investor platforms in the near future.

Vanguard All-in-One ETF vs. Vanguard Global Balanced Fund

Having recently launched three asset allocation ETFs, commonly referred to as all-in-one ETFs, Vanguard now has a multitude of low cost, broadly diversified, and simple solutions for Canadian investors (including my own four-minute portfolio).

With Vanguard Balanced ETF Portfolio, investors get an index-based product that holds seven ETFs under one low-cost umbrella (0.22 percent) with an asset allocation comprising of 60 percent equities and 40 percent fixed income.

The new Global Balanced Fund, on the other hand, comes with a maximum MER of 0.50 percent, but as a mutual fund it can be bought and sold with no trading fees. This fund might be ideally suited for investors who contribute on a monthly basis. The fund will hold approximately 66 percent equities and 33 per cent fixed income.

More on this in a future comparison column.

The Vanguard Effect?

I spoke with Atul Tiwari, managing director of Vanguard Investments Canada, about Vanguard’s foray into the Canadian mutual fund market. He said the timing was right to introduce their first mutual funds in Canada and bring the Vanguard effect to Canadian mutual fund investors.

What exactly is the Vanguard effect? Originally coined by Morningstar, the term describes Vanguard’s sizeable influence on new markets it enters where competitors feel the need to reduce fees in order to remain competitive.

“As a group, Canadians hold about $1.5 trillion in mutual fund assets,” said Mr. Tiwari. “Vanguard has a long track record of lowering investment costs in the areas in which we operate, so we see providing greater choice and lower costs to a broader group of investors as very positive.”

Indeed, when Vanguard entered the Canadian ETF market in 2011 it did so with just six products. Fast forward today and Vanguard manages $16 billion in assets with 36 Canadian ETFs. In that time, the average management expense ratios have declined in 12 of the 13 ETF categories in which Vanguard competes. In categories where Vanguard doesn’t compete, fees fell in just five of 12 cases, according to an internal Vanguard analysis.

“Low cost is in our DNA,” said Mr. Tiwari.

Expect Vanguard Canada to add to its mutual fund lineup in the coming years and for the Vanguard effect to give a much needed shake-up to the mutual fund market.

When asked about the Canadian Securities Administrators’ decision not to ban embedded commissions on mutual funds, Mr. Tiwari said he believes the Canadian market, like other regions around the world, will organically evolve away from it.

“Vanguard will continue to champion the interests of Canadian investors with more low-cost and high-quality product options.”

Our kids’ activities wrapped up this weekend and now we’re inching ever so closer to summer vacation. Soon we’ll be heading out to Vancouver Island for 10 days of rejuvenation and exploration along the Pacific coast at the end (or the start) of the breathtaking West Coast Trail.

The trip will be a first for our family as our kids have never been on a plane. We thought we’d prepare them for our big trip to Ireland next year by taking a short flight from Calgary to Victoria (then renting a car for the 90-minute drive around to Port San Juan bay). They’re unbelievably excited, which of course adds to the overall enjoyment of the holiday. It should be a good one, and much needed after a long winter and busy spring.

I redeemed 60,000 Aeroplan miles to book the flights, forking over $600+ in fees and taxes for our flight reward. Booking the flights directly would have cost $1,780 for the four of us. That meant a return of about 1.9 cents per mile. Not the best value, but definitely worth it for our little family travel experiment. In comparison, I’m now looking at business class flights to Dublin and the return on those reward tickets is closer to 8 cents per mile.

While on Vancouver Island we’ll explore ancient forests, take some epic hikes, discover what lives inside of tide pools, eat fresh seafood, and simply relax and enjoy everything nature has to offer along the west coast. We can’t wait for summer break!

This Week’s Recap:

This week I wrote about my disappointment with the Canadian Securities Administrators’ decision not to ban embedded commissions on mutual funds. While they did make some modest concessions to help protect investors, it was a missed opportunity for more substantial reform.

Over on the Toronto Star website I shared how to make your own financial plan in eight easy steps.

This past week I tried out two boutique fitness studios and I’ll breakdown the cost, experience, and sweat factor in my Toronto Star comparison column next week.

Promo of the Week:

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Check out my review here.

Weekend Reading:

Rob Carrick on the CSA’s decision: It just became clear we’ll never see an investment industry where clients must come first.

General Electric was just booted from the Dow Jones Industrial Average, marking the first time in 110 years that the prestigious 30-stock index won’t include the iconic maker of light bulbs and engines.

Ben Carlson explains why the next bear market could be even more painful for many investors, even if it’s not of the same order of magnitude as the last crash.

Two surprising lessons from legendary short-seller Robert W. Wilson:

1. The greatest short sellers barely break even.
2. The primary goal of short selling should be to provide cash in a sell-off and let you “back up the truck” on your longs.

Here’s Morgan Housel on why long tail events drive everything:

“Losers keep losing because no one wants to be associated with losers, and winners keep winning because winning opens doors, and open doors beget more open doors.”

People are too nervous to pull the trigger and retire, but dying at your desk is not a retirement plan.

Jonathan Clements shares five uncomfortable realities about retirement. Because you will retire one day—and, if you want to spend your final decades in even moderate comfort, it won’t be cheap.

Mortgage expert Rob McLister says that as bond yields trend lower, variable rate mortgages are looking all the more attractive.

I love this video by Ben Felix in which he explains why housing is the best investment in history, but only on paper:

Rob Carrick asks whether your loved ones could figure out your finances if you died suddenly.

Michael James explains how governments and businesses take advantage of those who can’t or won’t do basic math.

How many ETFs are enough to make up a diversified portfolio? Mark Seed tackles a few reader questions on this subject.

Barry Choi talks about his accidental intentional lifestyle inflation during and after a trip overseas.

Aeroplan promises a transformed rewards program in 2020 (post Air Canada breakup), but experts are sceptical it will fly in an increasingly crowded market.

Finally, this Super Elite flyer claims Air Canada revoked his Altitude status after he refused to explain a last minute cancellation.

Enjoy the rest of your weekend, everyone!

In what should have been a historic day for Canadian investors, the Canadian Securities Administrators (CSA) instead disappointed with watered down reforms that skirt around the edges of true investor reform.

What investor advocates wanted was a ban on embedded commissions charged from mutual fund sales, and for the industry to adopt a best interest standard of care for its clients.

What we got instead was a ban on the already declining deferred sales charge option on mutual funds, a ban on trailer fees charged by discount brokerages (which shouldn’t have been allowed in the first place), and a ‘beefed-up’ suitability standard and disclosure on conflicts of interest that will surely be ignored. Pathetic.

The long awaited decision came after, and I’m not making this up, five-and-a-half years of consultation on mutual fund fees. The CSA knew then there was a problem when it stated:

“We identified how embedded commissions give rise to conflicts of interest that misalign the interests of investment fund managers, dealers and representatives with those of the investors they serve.”

The regulator then gathered compelling evidence that this type of compensation model for financial advisors leads to inherent conflicts of interest which leads to poorer outcomes for investors.

So what happened? Why did the CSA deliver such weak investor reform when the evidence clearly supported a ban on embedded commissions, as was done in Australia and the U.K.?

Score one for the industry: No ban on embedded commissions

Enter the powerful investment industry and its lobbyists, which have $1.49 Trillion reasons to maintain the status quo. The industry argued that unintended consequences would arise from the banning of commissions, namely that it would create an “advice gap” for smaller investors who could not afford to pay directly and upfront for financial advice.

It’s a bogus argument, and one that was proven wrong after the U.K. conducted a post-implementation review that found “the ban had reduced product bias from advisor recommendations and led to better investor outcomes.”

Industry lobbyists said advisors would leave the industry because their business model could not be supported without ongoing commissions from trailer fees. To that I say, “good riddance.”

The proliferation of online investing platforms (robo-advisors) and improved DIY options for investors have already started to fill any perceived gap. And are we really to believe that small investors are getting actual financial planning advice from their advisor? No, an annual phone call to make their RRSP contribution doesn’t cut it.

Finally, the industry wants to raise the professional standards for its advisors to their highest possible level through ongoing proficiency standards, continuing education requirements, and adhering to a code of professional conduct.

That’s commendable, but if the industry wants to be put on the same playing field as other professionals such as lawyers and accountants, then surely it wouldn’t object to a similar compensation model that would have advisors charge clients directly for advice. Right?

A letdown for Canadian investors

The CSA’s decision today is a huge letdown for Canadian investors. Advocates expected real reform, and instead the regulators caved-in to industry pressure and delivered half-measures at best.

Here’s what we get:

1. Enhanced conflict of interest rules for dealers and representatives requiring that all existing and reasonably foreseeable conflicts of interest, including conflicts arising from the payment of embedded commissions, either be addressed in the best interests of clients or avoided. (More regulations around the Know Your Client and Know Your Product forms)
2. Prohibit all forms of the deferred sales charge option and their associated upfront commissions in respect of the purchase of securities of a prospectus qualified mutual fund. (They’re banning DSCs)
3. Prohibit the payment of trailing commissions to, and the solicitation and acceptance of trailing commissions by, dealers who do not make a suitability determination in connection with the distribution of prospectus qualified mutual fund securities. (They’re banning trailing commissions on mutual funds sold through discount brokers, since these brokerages cannot give advice)

Why it doesn’t go far enough?

The deferred sales charge option is already disappearing from the industry (13 percent of total fund assets last year). Even Investors Group discontinued the DSC purchase option for its mutual funds on January 1, 2017.

Trailer fees should have never been applied to mutual funds sold through discount brokerages and, while this looks like a small win for investors, a proposed class action lawsuit filed against TD in April might have squashed this practice anyway.

The conflict of interest disclosure and amendments to Know Your Client and Know Your Product sound great on the surface, but without a fiduciary duty to look out for clients’ best interests these reforms lack any teeth and will continue to be ignored in practice.

All in all, it’s a sad, disappointing day for Canadian investors and investor advocates who were hoping to finally shake-up an industry that’s become all too powerful and complacent. Maybe in another five-and-a-half years?