In recent columns, Jon Chevreau took Investors Group to task for the sky-high MERs charged by its mutual funds. He rightly questioned why investors have $12.73 billion parked in the Investors Dividend Mutual Fund with a MER of 2.69% when the iShares Dow Jones Select Dividend ETF (TSX: XDV) has pretty much the same holdings and charges a MER of just 0.53%. Even after accounting for a financial advisor fee of 1%, holding XDV leaves slightly more than an extra 1% in the investor’s pocket.
While it is important to point out that mutual fund fees are egregious, it is also important for Canadians to take the initiative and do the math on how much fees are costing them. Let’s say John invests $10,000 in the Investors Dividend Fund. Jane, on the other hand, invests $10,000 in XDV through an advisor. One can reasonably expect the two funds to post the same returns given that the holdings are very similar. Assuming XDV returns 6%, Jane will have $32,000 after 20 years. John’s investment, on the other hand, will only grow to $26,500 since Investors Dividend Fund will return about 1% less.
There is no reason to just wring out hands in despair over high mutual fund fees. We have plenty of choice when it comes to low-fee investments. Investors can assemble sophisticated portfolios with Exchange-Traded Funds (ETFs) or mutual funds either on their own or through an advisor. Plenty of low-cost active management options also exist. Mutual fund companies like Phillips, Hager & North and Steadyhand have fund in their line up that charge less than half the fees charged by a typical mutual fund and also offer some handholding. And companies like Jarislowsky Fraser offer active management at a fraction of the cost of typical mutual funds.
Mutual Fund companies like Investors Group are for-profit enterprises and there will never be much incentive for them to cut their fees (and take a hit to profits) as long as Canadians are content to hold their fee-laden products. If more Canadians become fee conscious and opt to move their investments to low-fee products, companies like Investors Group will likely be forced to reduce their fees to stay competitive.