A recent Morningstar report shows how egregiously bad mutual fund fees in Canada are when compared to other nations. The report found the median asset-weighted expense ratio to be 1.31% for fixed-income funds, 2.31% for equity funds and 0.80% for money market funds. These fees were the highest among the 22 countries in the survey for equity funds, third highest for fixed-income funds and tied for highest for money market funds. Morningstar found the fees so bad that they ranked Canada an F, a grade that none of the other 21 countries received in any of the four categories — regulation & taxation, disclosure, fees & expenses and sales & media — in the survey.

Morningstar also attempted to address claims made by the Canadian mutual fund industry that reports such as this do not make an apples-to-apples comparison:

Claim: Canadian mutual funds contain “trailer fees” that are used to pay for distribution costs, while funds from many other countries do not.
Counter: With rare exception, every country’s funds pay for distribution costs out of their funds’ total expense ratios.

Claim: Canadian mutual funds have lower front-end load charges than those in other countries, thus it is understandable that Canadian mutual funds have higher ongoing expense ratios.
Counter: Canada’s load structure is broadly similar to the global average. In many countries, funds with a front-end sales charge are in the minority, and in many countries as well these charges can and are negotiated to lower levels than are stated in the prospectus.

Claim: Canadian mutual funds must pay a value-added tax that pushes up their official expense ratios.
Counter: The source of the costs is immaterial to the fund investor, and do not obviate comparisons. Also, many European mutual funds also carry value-added taxes.

Claim: Canadian mutual funds are required to show greater transparency in expense reporting than are the funds in other countries.
Counter: Canadian expense disclosure is not materially different than the expense disclosure of the 21 other countries in this survey.

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.

And it’s not just in the fees category that Canada received poor grades. We also received a D in regulation and taxation because of “steep investment taxes” levied on fund management fees and a high tax bill on investment returns. Morningstar looked at taxes on a standard portfolio (60% equities, 40% fixed income) with an initial value of $100,000 and held over 5 years. The effective taxes on the investment worked out to 26% in Canada, the highest in the list.

Michael James weighed in on the report here and Jon Chevreau’s take is available here.

This article has 25 comments

  1. Canadians pay high taxes, er fees? Shocking … 😉

  2. I wonder how many Canadian mutual fund investors see reports like this and think “I’m one of the smart ones because I don’t pay any fees.” Thanks for the mention.

  3. I think Michael hit the nail squarely on the head. 🙂

    One thing that Canadians do have is choice – there are a lot of very good low-cost options for mutual fund investors.

  4. Yep, I agree we have plenty of options. If more Canadians and their advisors deliberately sought out low-cost investing options, the fund companies will be forced to lower their fees.

    @Sustainable PF: Actually, I was surprised that our investment taxes are the highest in the world. Higher than supposedly highly-taxed European and Scandinavian countries.

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  6. Why am I not surprised…..Canadians need to demand better or avoid mutual funds all together and invest by themselves. I’ve been running my own “mutual fund” for more than 10 years now.

  7. In general, Canadian companies don’t compete with each other to provide goods and services to consumers. They find it more beneficial to collude with each to keep prices high. Who wouldn’t? It is also very difficult to prove collusion. This is true of the mutual fund industry, banking and telecom, just to name the most egregious. Time to legislate…?

  8. I had nothing much to show for owning Mutual Funds from 1999-2010. I figure I paid over $60-$90K in MER fees with nothing much to show for the lost decade, not to mention any growth in the money.

    One unnamed fund I owned was all blue chip Canadian and should have paid about a 4% distribution last year. It paid nothing as the fund managers kept the money for themselves at the end of 2010. Stupid me – I didn’t know they could do this and get away with it.

    I have since given all but two of the Funds the bum’s rush over the past 18 months or so. They have been replace with select blue chip dividend positions and some carefully chosen ETFs to create a level of diversity I am comfortable with.

    I have already noticed the difference as I figure to have saved almost $8K in MER fees last year. I have also been spreading the word the mutual fund racket to all my family and friends. Never again.

  9. @Kanwal: There are plenty of low-fee options available even in mutual funds. Hopefully, Canadians will gravitate towards them and force the high-fee guys to react.

    @Sean: While I don’t disagree that many Canadian companies have a nice oligopoly (I hesitate to call it collusion) going, plenty of cheaper options are available in mutual funds, banking and even telecom. I don’t know if it is inertia but many of us don’t actively seek out the cheaper alternatives. For instance, I’ve been meaning to cancel my Bell Internet subscription and go with Teksavvy (about 35% cheaper even without any bundling discounts). But I’ve been procrastinating on pulling the trigger. I wonder if in many sectors sheer inertia keeps consumers loyal to their current providers.

    @hobbyfarmer: I’m sorry to hear about your poor experience with mutual funds. I totally agree with you that the lower the investment costs, the better it is for you.

  10. With the exception of TD eSeries funds, most Mutual Funds in Canada are ripoffs. Better to stick to ETFs or build your own mutual fund with discount brokerages you can keep commission down and come out ahead. Banks don’t care about customers they care about there shareholders.

  11. @Dalmar (and others):

    While TD eSeries funds get often touted, I’d like to say that the RBC index funds are not bad either. The eSeries is the cheapest, but RBC isn’t that far off either, although I’d still like to see both at a cheaper MER.

    I’ve often contemplated on switching to TD, but I don’t know how complicated it would be to transfer my RRSPs, TFSAs and non-regs in kind from RBC to TD – and I don’t know if the effort is worth the small difference in MERs. I’ve also considered ETFs, but again, not sure how complex the transactions would be…

  12. I use several ETFs. XIU (0.17%), XDV (0.5%) and XEG (0.5%) are very liquid and easy to trade. XDV & XEG can be used to round out a portfolio’s Canadian diversification very cheaply while paying more than decent eligible dividends.

    I also own XLB, XSB, XIG & XPF. These are not very liquid, the first three are bonds, the last XPF is preferred issues 50/50 CDN & US. They are better suited as longer holds in RRSP in my opinion. PH&N Bond Dividend Fund D Series is also nice in RRSP.

    I reserve Mutual Funds for tough stuff like targeted emerging markets and some commodity sectors. I find the ETFs in these areas often own just too many holdings.

  13. @CC:
    I must be missing something then.. (?) Although now when I look at it, it appears the MERs for 2010 were a bit more than last year. : / Still far cheaper than non-index…eek. It took me way too long to jump on the index bandwagon – just last year I converted all my funds to index. Sigh…8 years of non-index. Shame.

    Cdn Bond Index: 0.65 (RBC) vs. 0.48 (TD)
    Cdn Index: 0.70 (RBC) vs. 0.31 (TD)
    US CN Index: 0.70 (RBC) vs. 0.48 (TD)
    Intl CN Index: 0.69 (RBC) vs. 0.50 (TD)

    One thing I do like is the ability to work with a person at the branch if there’s any adjustments/etc. that I need to do, although really that’s not enough of a cause to take the more expensive route…

    Hey CC, have you ever looked at doing a break-even analysis of mutual fund PAPs vs. ETF MERs + brokerage fee for more frequent deposits than once a year or quarter – i.e. biweekly/monthly? I’m sure I could take some time to develop an excel formula for it, just never tried it.

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  15. BasilTheSecond

    The reason fees are so high is because of colusion of participants to maintain high prices. The time has come that anti-trust agency takes measures it took with Real Estate Multiple Listings Service.

  16. “For instance, I’ve been meaning to cancel my Bell Internet subscription and go with Teksavvy (about 35% cheaper even without any bundling discounts). But I’ve been procrastinating on pulling the trigger. I wonder if in many sectors sheer inertia keeps consumers loyal to their current providers.”

    I strongly encourage you to do it! I’m a happy Teksavvy customer, and I love to support competition in Canada. Internet access is hugely important to me and it would be terrible if we only had access to the big players with their crappy connections, low caps, and high fees.

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  18. CC, good posting on this topic which seems to be in perpetual debate in some circles. I confess to not being intimately familiar with how a lot of overseas countries calculate published MERs. But I do know that there are differences and for Morningstar to say that the practices are “broadly similar” makes me wonder what that really means.

    For instance, since we have a growing universe of fund-of-fund products, it’s worth noting that for more than eight years, Canadian FoF MERs have to be all-inclusive (i.e. include MERs of ‘top’ fund and all underlying ‘bottom’ funds). Based on what I’ve seen and read, this is the exception globally, not the rule.

    Also, what no study has counted in its global comparison is what investors pay for advice above and beyond published MERs. Nor has any study looked at total fund costs including embedded trading costs (i.e. costs to the fund to buy and sell securities).

    I’ve written a couple of relevant articles in recent months on this topic…

    An illustration of how embedded brokerage costs can impact the MER comparison

    A follow up focusing on Canada vs. U.S.

  19. @Dan: The Morningstar report says that they included the cost of advice to the extent possible in the TERs in the report:

    “In 15 countries it is rare for an investor to pay for advice outside of the charges imposed by the funds through their TERs and (possibly) sales charges, but in a handful of countries this occurs more frequently. In Australia, India, New Zealand, the United Kingdom, and the United States advice is sometimes paid for outside of loads and fund expenses. Paying for advice outside of fund sales charges and TER is not a known practice in China or Thailand.”

    That said, I agree with your point that the report is confusing. It is not at clear to me who the respondents to the survey were and whether they were clearly explained how to report TERs. I find many of the responses baffling. Example: What is the maximum marginal tax rate on long-term investments? For Canada, the response is 10% to 19%!

    Ultimately, this discussion may be somewhat academic because the bottom line for Canadians is that we pay a high price to invest in mutual funds. Reasonable people will agree that advisors should be fairly compensated for their work but the quality of the vast majority of advisors in Canada leaves a lot to be desired. All too often the trailer fees turn out to be simply a commission for selling mutual funds and not fair compensation for providing competent financial planning.

  20. @Canadian Capitalist

    I agree with you in general on the qulaity and ethics of financial advisors. My wife and I met with three as a result of pre-retirement courses in the last couple of years. This small sample all had the same advice. “Dump your current Mutual Funds and buy mine.” This would have started the clock ticking again in the case of DSC’s which were the common recommendation. You can only blame them so much though as this is how they get paid for the most part but the whole advice business has attained a shady view and prejudiced me.

    I cannot see many good reasons to buy Canadian based MF investments with all the other low priced choices out there. It’s difficult for the average person to find and pay someone who will build that kind of lower cost portfolio – this because I made two offers to do so to two of the advisors. So now I am retired and I do it myself, luckily I find the market interesting. I now plan my own asset allocation, perform my own analysis and am a member of a few informal groups who share and debate views. I also believe I am also up quite a bit over the shadow portfolio of old MFs I owned which I use as my reference point.

  21. re: Teksavvy

    Great to hear, CC. I’ve also replaced my traditional phone with Babytel.ca, a voice-over-IP company. I have dry-loop DSL from Teksavvy (meaning it’s installed on a phone line that doesn’t have a voice subscription with BEll or whoever) and I pay about 20$/month for my Babytel account and I have caller ID, voicemail, call-waiting, etc. Sound quality’s great, and when I get a voicemail, I get a email of the sound file so I can listen anywhere. You can also bring your home phone anywhere there’s an internet connection (you just carry around the small ATA box and plug a phone in). Another way to stop supporting the big telecoms that seem act like state monopolies..

  22. Fees, Fees, and more discussion around fees. When will it end. No doubt fees are an important aspect of financial modeling for long term gain. Something I look for when constructing portfolios is not only if the fund is beating the index, but if it’s also beating the MER for its group. Plenty of funds have proved to be excellent investments at a reasonable cost. Comparing against other countries is a waste of time as we need only to focus on the best options of what we have. From low cost mutual funds to ETFs plenty options exist.

  23. Its time for canadian investors to wake up and smell the bull****. I have invested in mutual funds for 15 years with so called “the best avdisors” and what a waste of time and money!!! From investment firms to Banks, mutual funds are vehicles to make everyone rich except you the investor! I’ve been managing my own 250k stock portfolio for the last year, in a tough market, and I’m up 12% at a total cost of 400$ . I was paying about 3000$/year to manage 100k through IG and 1500$/year though a Bank and both without any decent financial advice. Basically throw money into it for 20 years and you’ll retire rich…. Hopes and Dreams real boiler room stuff. Look out people.