Holes in report damning high mutual fund fees

Holes in report damning high mutual fund fees

Holes in report damning high mutual fund fees The Canadian Centre for Policy Alternatives delivered a damning condemnation of mutual fund fees Wednesday. In many respects it’s a day late and a dollar short.

Canada’s much maligned mutual fund fees have been the object of derision for some time now so the 22-page report from CCPA, while well produced, seems so 1990s.

Heck, Alberta financial planner Robb Engen, author of the extremely popular blog, Boomer & Echo, has been writing about high MERs for many years. In a 2011 article Engen suggested that Canadians look to cheaper alternatives like ETFs.

Fast forward to today and CRM2 is pulling, prodding and otherwise embarrassing the industry into action. The average equity mutual fund in Canada in 2014 according to this report was 2.1%, six times higher than the average pension plan fee of 0.38% – 0.36% for defined benefit plans and 0.69% for defined contribution plans – and a big reason why Canada is considered to have some of the highest mutual fund fees in the world.

But is that really what’s happening?

Mutual fund companies in Canada continue to lower their fees offering F-class shares, reduced MERs on assets above a certain dollar amount, pooled funds, etc. It’s hard to imagine that every advisor in this country using mutual funds is putting all of their clients into funds with higher than average MERs.

WP ran an article in early February discussing the subject of fund fees. It revolved around State Street’s move in the U.S. to cut the MERs of 41 of its ETFs, in some cases by 50 percent or more.

There wasn’t anything out of the ordinary about the article itself but it sure generated a bunch of comments on the WP website. Most expressed a feeling that media in this country (including WP) aren’t doing a good job comparing apples-to-apples.

Tim Affolter, an advisor with Assante in Castlegar, B.C., points out that pooled funds have fees that are considerably less than the 2.1% average MER the CCPA uses in its report. For example, global equity pools average 0.95% MER, which is for the product-only with the advisor charging separately for advice.

But try as we might it’s unlikely that an apples-to-apples comparison is ever truly achievable. Like baseball stats, fund fees can easily be manipulated.

Take the CCPAs average defined benefit plan fee of 0.38%. That’s incredibly low but it’s also incredibly deceptive.

The Fraser Institute’s September 2014 research bulletin discussed the cost of running the Canada Pension Plan. While its operating costs in 2012-2013 were 0.28%, the total cost of running the plan was actually 1.15%, three times the rate stated by CCPA, and you can bet CPPs operating efficiency is better than most.

So, while there’s no doubt mutual fund fees can be lower (what in life couldn’t?) when reports come out using old or tired information to paint an industry behind the times, it’s important that media outlets explore both sides of the story.

WP hopes to carry on the conversation with advisors in the days and weeks ahead. For now, let’s just take a deep breath and be as objective as possible. We’ll all be further ahead as a result.

Are there lower-cost mutual fund alternatives available? You bet. And for far less than the CCPAs 2.1%. 
 
11 Comments
  • Kathy Waite Your Net Worth Manager 2015-02-26 12:26:58 PM
    I think the point Rob Engen, myself, Sandi Martin, Larry Elford, FAIR, Jonathan Chevreau, David Chilton, Preet Bannerjee ( and if you don't know who these people are you need to get out once in a while and not just drink your mutual fund dealers Kool aid) is that all businesses need to make a profit or they will not be there to look after clients long term. The issue is transparency , what am I paying and for what ? Then a variety of choices for people ETFS, mutual funds, active or indexing.
    People are their own worst enemy spend more time planning a vacation that their retirement.
    Its interesting I always get a slew of new clients in bad markets. In the good the apathy prevails.
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  • Gerald Curtis 2015-02-26 12:49:42 PM
    It never ceases to amaze me how data can be so skewed by people with an agenda. The CCPA objective of every Canadian having access to money management at less than half a percent of assets is just totally unrealistic.
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  • Bob T 2015-02-26 12:51:08 PM
    Apples to Apples comparisons are virtually impossible here but it seems that one of the real risks to retirement savings is really ignored in this report.

    What about the investor who buys his RSP at his bank and invests solely in GIC's because they are "safe". Recent GIC rates are around 2%. How long would you have to work at that rate to retire with the same numbers as the "pension fund" shown in the report.

    Advisors can only work with what is available. If fees are the major predictor of performance wouldn't you, therefor, be better off with GIC's and no fees.

    A good advisor can guide a client through the choices available. A good advisor "not a captive advisor" could point out to a client that Investors Group has the highest fees. A good advisor can point out the risks on the downside of investing solely in ETF's and tailor a portfolio of investments which meet a clients risk profile.

    A good advisor controls
    1. risk
    2. costs
    3. suitability
    4. diversification

    A good advisor informs clients that nobody is smart enough to predict where markets are going to go in the future but structures a prudent approach to investing.

    A good advisor needs to be paid for providing that advice but does so without hiding that compensation. Banning trailer fees for me would be a good approach but make sure that the press also advises people that they need to be prepared to pay a reasonable amount to an advisor.
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