Still, we love fooling ourselves and doing nothing while we’re being harmed slowly. Like lobsters in a pot.
In honesty, can you claim you don't know that Canada has extremely high investment expenses? Especially after this week’s extensive media attention?
Compound interest is the secret ingredient in investment growth. The Management Expense Ratio (MER) is the enemy. Yes, we need to pay something but the more we pay, the worse our returns. Since the MER is often deducted on a daily basis, the effect of the cost is compounded too. The damage builds over time. Plus, in absolute dollars, you pay more as your investments grow.
The FactsLet’s start with research and reports from credible sources.
Morningstar Global Fund Investor Experience (Mar 2011)“Canada is the only country [out of 22] in the survey with TERs [Total Expense Ratios] in the highest grouping for each of the three broad categories [equity funds, fixed-income funds and money market funds] … These costs cannot be explained by pointing to unique features of the Canadian fund market.” (page 22)
“Positively for fund investors, sales and media practices are excellent and disclosure is very good. Unfortunately, these benefits are counterbalanced by steep taxes and the highest fund costs found in this survey … Nor does it [Canada] offer fund investors the protection of a board of directors.” (page 24)
“ … the Canadian funds community is the only funds groups to claim last year’s Global Fund Investor Experience report was methodologically flawed in its treatment of fund expenses … A final claim is made that Canadian mutual fund costs should not be compared to those of the United States, because the U.S. marketplace is much larger and therefore enjoys greater economies of scale. This argument has some merit, but it does not explain why Canadian fund expenses are significantly higher than those in other countries with modest population bases, such as Belgium, Australia, Sweden, Norway, and Hong Kong, to name a few.” (page 58)
Here's a link to the full report (PDF)
Financial PostJonathan Chevreau wrote: “I doubt any objective advisor would counsel against buying the iShares ETF through a discount brokerage though my bet is quite a few would counsel against buying Investors [Group] Dividend Fund for the simple reason it’s overpriced … when a far cheaper alternative exists. It’s beyond me how the firm can countenance this stance while also trying to wrap themselves in the rhetoric of their alleged efforts to improve financial literacy. — OK, Investors Group, now the gloves are off on your financial literacy stance (Dec 1, 2011)
“Has there been a sea change in consumer attitudes to fees and the dramatic contrast revealed by the surging ETF industry? Or are we so helpless as investors that we willingly turn over 2.7% in management fees to companies like Investors Group to make our decisions for us?” — The MER Debate (Dec 6, 2011)
Investment Executive“Outside of deposit accounts (held by 90%), affluent Canadians are most likely to invest in mutual funds (held by 56%). This is one of the highest levels of mutual fund ownership of all countries surveyed.” — Affluent investors in Canada rely on professional advisors: survey (Dec 8, 2011)
The Globe and Mail“The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) complained that under the current regulatory environment, there’s limited price competition and demanded that Ottawa look into the high cost of investing. Federal Finance Minister Jim Flaherty said he would ask the Senate national finance committee to investigate.” — Canadian Investors ‘gouged’ by fees (Dec 5, 2011)
“Given that Canada has some of the highest mutual fund fees in the world, we are used to seeing fees of 2.4 per cent and higher. Investors Group, however, stands out among fund companies in Canada because their fees often hit around 2.7 per cent. This is but one of the red flags.” — Investors Group mutual fund fees among the highest in Canada (Dec 6, 2011)
“It is beyond pathetic that no mutual fund company in this country wants to make low fees a key part of its marketing pitch to investors. Our fund industry abides. It’s insular, complacent and arrogant. It too often charges high fees for lame funds that investors buy through advisers who provide no advice.” — The no-gouge way to better investing (Dec 7, 2011)
Canadian Labour Congress (CLC)An online calculator shows what happens when you invest a lump sum of $10,000 and earn a compound return of 5%. With a mutual fund charging 2.5% guess what happens after 30 years? You have under $21,000 and your advisor has over $22,000. This is a win/lose and you’re on the wrong side.
After 45 years, the results continue to compound against you. You have less than $30,000 and your advisor gets over $60,000.
With low fees of 0.5%, you win. After 45 years, you have over $72,000 and your advisor gets less than $18,000. Don’t cry for your advisor. You aren’t their only client and the investment was entirely yours.
DisagreementThe Canadian investment industry doesn’t see a problem. Surprised?
They argue that we lack economies of scale. That makes for sense for physical things like installing fiber optic cable or paving roads. An investment is an electronic transaction, and computations keep getting cheaper.
Another argument is that you're paying for advice. Perhaps but there are questions too
- how good is the advice? what are the objective measures of quality? what are the penalties for bad advice?
- how much are you paying?
- how much does the advice cost? Is this cost dropping?
How meaningful is advice without guarantees or penalties?
If you've been burned by bad investment advice before, do you still believe your advisor has a magic crystal ball? Do you believe you get the same quality of advice as the big investors like pension funds, insurance companies and banks?
If you're not getting amazing advice, maybe your best option is to lower your costs.
Why Hide?Why is the cost of advice hidden from you? Maybe that's because you wouldn't pay for the advice if you saw the bill. Maybe you would demand more for your money or demand to pay less for what you are getting. Maybe you’d look for better advice even if that cost more. After all, most advisors are close to average, which impairs the advice they are capable of offering.
The Real Purpose Of MERsI've been to nonpublic seminars where investments are introduced to advisors. There's a standard pattern. The presenter shows how the new investment team beats the gang that just got turfed. We see carefully-constructed examples of amazing past returns that no one actually achieved. Advisors are shown the point-of-sale material. Who needs skill when you’ve got nice coloured charts? The best is last: slides on how high the compensation is. Now go out and sell sell sell!!!
I've never seen a slide that shows the portion of the MER intended for advice. As an investor, have you?
A big portion of the MER is a sales commission. Advice is the cost of making the sale, an attempt to show the expertise of the advisor.
The MERs are high because we continue to buy. Would lower MERs increase the investment manufacturer’s market share? Probably not because of buyer inertia and since competitors can quickly copy. It's like gas prices. There are different chains but the prices match. You get a sense of the margins when you see how much less Costco charges for gas.
UnbundleBundles often have compromises that boost profits. Who really eats the ketchup chips in the variety pack? How good is the headset that came with your smartphone?
When you invest, you pay for advice and administration (including transactions and record keeping). You won't know how much unless the components are separated. You might then be surprised and decide to do something. Not now, but later. Until then your inertia costs you a bundle.
- The hole the mutual fund industry has dug for itself (Financial Post, Apr 2013) (new)
- Mutual funds: would we buy them if we knew the costs? (Financial Post, Apr 2013) (new)
- Mutual funds: the Rule of 40 (MoneySense, Nov 5, 2012) (new)
- Morningstar 2012 Stewardship Grades (Oct 10, 2012) (new)
- John Bogle: A mutual fund master, too worried to rest (Aug 2012, New York Times) (new)
- OK, Investors Group, now the gloves are off on your financial literacy stance (Financial Post, Dec 1, 2011)
- Canadian investors ‘gouged’ by fees (Globe Investor, Dec 5, 2011)
- The no-gouge way to better investing (The Globe and Mail, Dec 7, 2011)
- Investor Group mutual fund fees among the highest in Canada (The Globe and Mail, Dec 6, 2011)
- Mutual fund industry holds its ground (Financial Post, Dec 7, 2011)
- The problem with mutual funds (The Globe and Mail, Dec 9, 2011)
- The MER debate (Financial Post, Dec 6, 2011)
- Straight talk on RRSP and mutual fund management fees (Canadian Labour Congress microsite)
- This tax shelter scam was a $10,000 lesson (Moneyville, Nov 24, 2011)
- Is the best advice free or for-fee?
- The key to financial literacy
- What's $1,000,000 after tax on the investment growth?
- Do you understand compound interest?
- image courtesy of Nico Hogg (London England)
Podcast 147 (12:37)
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PS Remember that tax hurts too …