Mutual funds, despite being the investment vehicle of choice for millions of Canadians, are regularly underperforming – and fees are the culprit, says a wealth management president.
Chris Ambridge of Provisus Wealth Management says that many low-fee options aren’t always what they seem, as reporting doesn’t take the drag from fees into account, and that greater clarity is needed for investors. “A lot of people look the simple costs that they have to report, like MER, but there are many costs that go beyond that and it’s difficult in the instances of mutual funds to see exactly what they are without a lot of research,” he says. “The information is there, but you have to dig for it as an individual.”
In Provisus’ monthly insight report, he points to the new SPIVA Canada Scorecard approach developed by the S&P Dow Jones Indices, which reports on the performance of actively managed Canadian mutual funds, rather than that of their benchmarks. The takeaway, the report argues, is that “fees are often the difference between owning a yacht and dreaming about one.”
“The cost of owning investment vehicles, including many ‘low fee versions, needs to be understood in terms of investment returns because the underlying fees are also a drag on investment performance,” it states.
Ambridge adds that additional disclosure is important, especially as new CRM2 rules are to be implemented this week.
“Most clients are at a loss to say, ‘Well, how did I do over five years?’ or ‘How did I do compared to a benchmark?’- and that’s where clients are going to be seeing things in the six to nine months that will hopefully open their eyes and allow them to make a decision that it’s time, perhaps, to explore other options,” he says.
However, it’s up to advisors and portfolio managers to take a transparent approach, and educate investors on their options and the true impact fees are having on their returns.
“I would like to think so but Canadians are still reliant on their advisors, and that’s a good thing at this stage,” he says. “But it’s a matter of education, being aware of alternatives out there, the term we like to use is, you have to overcome inertia. Clients have to be convinced there’s a reason for change and then they go out and change it.”
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