A recent Morningstar report entitled Global Fund Investor Experience 2011 reaffirms what Canadian investor advocates already know: mutual fund fees in Canada are far too high. The report compares the total expenses (TERs) of funds available to investors in 22 countries and finds that Canadian fees are the highest for equity funds, third highest for fixed-income funds and tied for highest for money market funds. Further, the report states that “these costs cannot be explained by pointing to unique features of the Canadian fund market”, as is commonly argued by the mutual fund industry. Morningstar found that “Canada is the only country in the survey with TERs in the highest grouping for each of the three broad categories” and awarded Canada a failing F- grade in the category of ‘fees and expenses’, the lowest grade of all countries surveyed.
The report describes Canada’s overall C+ grade as “deceptively normal-looking”, stating that the grade hides major strengths and weaknesses. “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.”
Part of the blame for excessively high fees rests with the Canadian regulatory system. While regulators have done a good job of fostering competition in other areas of the financial markets, they have not done enough to encourage price competition among mutual funds and other financial products sold to retail investors. The regulatory system does not provide true transparency in fees. It allows financial advisors to sell mutual funds which have fees that are more than 100% higher than comparable products as “suitable” investments for their clients without disclosing to their clients the existence of cheaper alternatives. Canada has a regulatory system where financial advisors are allowed to call themselves “advisors” despite the fact that they have obtained a restricted licence which only allows them to sell mutual fund products; these restricted salespersons sell the highest fee products to investors who cannot afford to have high fees eat into their savings.
Morningstar found that “[i]nvestors in the United States pay the lowest TERs for equity funds and below average costs for fixed-income and money market funds. Market size and openness to foreign funds appears to have less of an impact on the fees paid by mutual fund investors than does the openness of fund distribution.” Unfortunately, “[w]ith regulation, Canada restricts competition by not permitting foreign-domiciled funds to register for sale in Canada. Nor does it offer fund investors the protection of a board of directors.”
Québec and Alberta would have you believe that Canada has the best regulatory system in the world: they are partly correct in that this is the best system for financial institutions and financial advisors – just not for retail investors.
Investor blogs weighed in on the findings of the Morningstar report:
Canadian Capitalist said that the “report shows how egregiously bad mutual fund fees in Canada are when compared to other nations.”
In Mounting Opposition to MERs, John De Goey notes that “[o]ver the years, many journalists (and only a few advisors) have lamented the comparatively high MERs charged by Canadian mutual fund companies. To date, the only real alternatives for ordinary Canadians involved either “sucking it up” and doing nothing or moving toward a higher allocation in individual securities, exchange traded funds (ETFs) and/or index funds.”
In a Wealthy Boomer article, Jonathan Chevreau notes that the Morningstar report rebuts IFIC’s “apples vs. oranges” fees excuse.