Canadian mutual fund investors: Wake up!

Mutual funds don’t deserve the bad rap they get in industry circles, investors do.



Online only.


mutualfunds_322Last week, I wrote about findings from a recent Morningstar Inc. report detailing that Canada has, on average, the highest mutual funds fees in the world. Meanwhile, our American neighbours are benefiting handsomely from having access to the cheapest.

The troubling Morningstar findings struck a chord with readers, who tweeted, emailed and commented directly on my article. For instance, Sheila Keenan? shadwell123 responded: “I know I should pay more attention to fees, I don’t know nearly enough about them.”

These two important questions were also posed: “Why buy mutual funds when you can buy exchange traded funds (ETFs), which have very low management fees?” Dorothy wrote. And from Lee Anne Davies @agenomics: “Why don’t we change?”

Let’s start with the first question. The simple answer is that sometimes mutual funds just make more sense for certain people—particularly, young or novice investors with little income who want easy access to a diverse holding of funds and the benefits of professional money management. If you buy mutual funds through a bank or mutual fund sales specialist (as many investors do), you’re likely going to be charged management fees (or MERs) well above 2%—but for investors just starting out, those high fees aren’t going to make much of an impact on their fledgling portfolio. Others with more sizable savings may also want to go with mutual funds because they’re either completely incapable or uncomfortable with managing their own finances. Or, maybe they want all or a portion of their portfolio to have a chance at beating the markets through active management—very hard to do, but not entirely impossible. Finally, mutual funds are convenient (thanks to monthly automatic preauthorized contribution plans) and avoid transaction costs.

Regarding ETFs, yes, they’re one of the best things to happen to Canadian investors in decades, but they’re not for everyone. For starters, you normally pay commissions to buy and sell them, which makes them unsuitable for portfolios with less than $50,000 and for those who contribute every month. They’re also fairly complicated for the novice, since they’re basically bought and sold like stocks. While you can enlist professional help, advisers in Canada licensed to sell ETFs often work only with wealthy clients.

These above reasons and more serve as the preamble to a feature article, “The Smart Investors Guide To Mutual Funds,” that will be appearing in the forthcoming Summer issue of MoneySense set to hit newsstands toward the end of June. We’ll be providing a comprehensive overview on how to use actively managed mutual funds intelligently, and how to avoid their many pitfalls. Bottom-line: If mutual funds are a better fit for you, you don’t have to get saddled with outrageous fees provided you’re a discerning investor.

Now, on to the second question: Indeed, why don’t we change? Why are Canadians, on average, paying through the nose for mutual funds? For that, I’m going to defer to former Mercer actuary Malcolm Hamilton, who retired last December after a long and distinguished career (although he’s now a Senior Fellow at the C.D. Howe Institute). The following excerpt is from his forward to MoneySense Editor Jonathan Chevreau’s book, The Wealthy Boomer: Life After Mutual Funds, in—wait for it—1998:

“American investors can find no-load mutual funds with MERs under 0.25%. Canadian investors can’t. For this, Canadians have only themselves to blame. We aren’t price sensitive. We either don’t know what we’re paying, or we don’t care. If the customer doesn’t care what the product costs, the producer has no reason to economize. High MERs mean better incomes for investment managers. They mean bigger profits for fund companies. They mean larger trailer fees for brokers. They mean fat advertising budgets. In the long run, everyone is happy—except the customer. Until investors demand a better product by rewarding those who provide it and punishing those who don’t, Canadian mutual funds will have high MERs. And as long as MERs stay high, using mutual funds intelligently means using them less.”

Sadly, Hamilton’s very blunt and accurate assessment was as true 15 years ago as it is today. Many Canadians who use mutual funds are either investing blindly or are completely apathetic to the enormous fees they’re being charged. If that sounds harsh, just remember that losing a big chunk of your returns every year to inflated fees is far worse than some financial tough-love advice.

Canadian mutual fund investors, it’s time to wake up and start pushing back.

20 comments on “Canadian mutual fund investors: Wake up!

  1. Strange to contrast mutual funds to ETFs, and not mention index funds – which do not have some of the downsides you attribute to ETFs. And to assert that high MERs do not matter to "fledgling portfolios" is some interesting math ….


  2. Some mutual fund providers have smaller MERs than others.

    An example is Phillips, Hager and North.

    Why doesn't Money Sense list such fund companies?


  3. I think that in order to say that mf fees are too high we have to look at the managers and what they are getting paid. It would nice to get a breakdown of what the company and it's managers are getting paid. Maybe a list of mf managers and their pay; like lists of company execs. It's likely that a mf corp has more expenses than .25% so to think they will work for free is a little ignorant. Not too say that they aren't getting paid too much it's just that that part of the equation is never offered when we talk about high MER's.


  4. It seems that anyone can publish articles these days. I always assumed that reporters would look at the facts. First of all, Canadian mutual funds fees over 2% include advisor fees. Let’s compare apples to apples. In the US the fund fees might be lower, but investors pay 1-1.5% in external service fees. If you include these service fees in the US, Canadian mutual funds might actually be cheaper.


    • "It seems that anyone can publish articles these days."

      That's more than a tad disrespectful.

      Are you an award winning journalist too? I doubt it.

      Have you read the Morningstar Global Fund Investor Experience Report quoted in this article and the previous one? I have. Canada is awarded an 'F' for mutual fund fees and expenses by Morningstar – their lowest rating of any country.

      For mutual fund fees and expenses, Morningstar awards the USA an 'A'.

      You are correct though that in the USA the investment advisor service fee is not included in the fund's service fee or MER.

      Regardless, Morningstar ranks every other country in the survey better than Canada for mutual fund fees.


  5. Now, let’s look at ETF’s. ETF’s have much lower fees than mutual funds. That is true…and that is also were the advantages end. Anyone that has ever taken an “Accounting 101” class would be able to tell you that what really matters is the “net” return (Investment Return – Fees = Net Return). Let’s take look at that. Below I have listed the returns for two of the most used ETF’s and three different Mutual Funds in Canada (Initial Investment of $1,000 from Apr. 2006 – Apr. 2013).
    1.iShares S&P/TSX 60 Index – Current Value: $ 1,234 dollars
    2.iShares CAN Fundamental Idx – Current Value: $ 1,367 dollars
    3.Fidelity Dividend Fund – Current Value: $ 1,466 dollars
    4.Dynamic Equity Income – Current Value: $ 1,508 dollars
    5.Mawer Canadian Equity – Current Value: $ 1,523 dollars
    All returns listed above are “net of fees”.


    • there is a difference between ETFs and mutual funds. ETFs are transparent and you know exactly what you are getting i.e. the TSX60. Between reporting periods, funds can pretty much trade what they like and then firm up the book at the end of the period.


    • Thomas: What was the source of your info to provide these returns? (Morningstar?)


    • Exactly…i dont understand the focus on fees…it is the return that is important


  6. Don’t get me wrong…I don’t like paying higher fees either, but if I end up with more money in my bank account because of it…the decision becomes quite easy. By the way, can you explain to me why higher fees don’t matter to smaller investors?


  7. Another great article David.

    Some points.
    “ETFs…For starters, you normally pay commissions to buy and sell them, which makes them unsuitable for portfolios with less than $50,000 and for those who contribute every month. “
    Most Canadian ETF providers offer Pre-Authorized Cash Contribution (PACC Plans) which allow investors to invest on a regular (monthly, quarterly or annual) basis in their ETFs without incurring additional trading commissions.
    Some brokers can facilitate these plans, others not.
    Eg iShares detail their PACC Plan here:
    ETF investing is 100% the way to go. Be it with $100, $500 or more.
    In relation to why mutual fund fees are still so high and Canadians put up with it. Frankly the Canadian financial industry needs to change. The UK and Australia are beginning to phase out the payment of commissions to Investment Advisors – they (like I) believe it a clear conflict of interest.

    We trust our Investment Advisors yet many continue to recommend mutual funds (due to sales targets and the commission they pay) when a mass of research (and fund results) shows that the majority of actively managed mutual funds underperform their benchmark index.

    IAs should have a good base salary. Commissions should not be paid. The banks make billions profit every year, they should use a small slice of that to vastly improve the financial future for Canadians.

    An investment time bomb is coming… Bond prices are high and yields low and globally stock markets may be at highs but results over the last 14 years have been hugely volatile.

    The S&P 500 during 2000 to 2012 returned a disastrous 1.74% annually (it lost -37.22% in 2008, -22.27% in 2002, -11.98% in 2001 and -9.11% in 2000).

    I believe the annual 7% investment growth assumed by many investment advisors to be far too optimistic. I think 5% would be a wiser target.

    We simply cannot afford to pay 2%+ annual fees anymore.


    • Thera are many broker now offering commission free ETF trading with no holding period required. They make their money on fee form the exchange i.e. providing liquidity to the products.


  8. Good article. But, it's not clear exactly how to we are to fight back and NOT accept the high mutual fund fees we have in Canada.

    Question: How can I see, in writing, exactly how much MER I am paying to the mutual fund co, and to my advisor (via trailer fees)?


  9. For a rookie which mutual funds would you recommend?


  10. I agree with the author Canadian mutual funds fees are too high, especially compared to their US counterparts. A Vanguard ETF is an example of a low fee investment. I think 75 basis points or around that annually isn’t that bad, but 200 basis points or more based on your initial investment, regardless of how the investment does is exorbitant. I think the financial services should do away with mutual funds and hedge funds altogether. It would better for them to waive the fee if the investment doesn’t make a profit, which is the idea. A better idea would be to let the company invest on behalf of each investor, and buy and sell like a retail investor when the opportunity arises, Anything with a rigid fixed time horizon in terms of redemption is almost certainly to do worse overtime than one that is flexible. Examples are US Treasury Bills, with fixed terms. I don’t want to tie up my money in fixed term investments like 1, 3, 5, 10, or the 30 year notes. You’re better off investing when an asset class is greatly undervalued, and selling when it becomes fairly valued, or even overvalued. If there are no great opportunities, park your cash in something that earns a return that you can sell without being penalized for, and then buy when the time is right, and the same goes for selling. Don’t trade unless you know what you’re doing in terms of knowledge and having the time to prepare in terms of researching and analyzing your proposed trades. Investing is the same thing, but you’re going long-term instead of short-term. I think being a successful stock trader requires possibly even more skill and knowledge than a skilled investor, because the time horizon is so much shorter, requiring more decisions in a shorter time frame, meaning usually the preparation has to be faster in terms of research and analysis.


  11. Not sure if this was the case when this article was published but it’s worth mentioning that there are now discount brokerages where you can buy ETFs commission free making them a great option for people with any portfolio size. You do pay commission when selling but if you’re investing long term and not constantly selling then it definitely makes sense (that’s what I do at least). I do agree that it can definitely be intimidating for people though, especially if they have little investing experience but there are great resources out there for those who are willing to learn. Just thought I’d mention this so people don’t get discouraged from ETFs just because they have a small portfolio and are just starting out in investing.


  12. How do we push back?


  13. Investors should tell each other what they like and which not, and why. FundPage has provide a platform just doing that.


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