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You would find a lot of discussion of the results of a Morningstar study in the financial press. Morningstar compared the mutual fund market in 16 countries and highlighted their strengths and weaknesses. Predictably, the report found that Canada’s major weakness was fees (and in fact, was graded a “F” on this front):

Canadian MERs contain “trailer fees,” which are fees fairly specific to the Canadian market. Trailer fees cover the expenses and commissions for the professional advisor. All fees, direct and indirect, are required to be published in the simplified prospectus.

The typical maximum front-end load for a Canadian open-end fund is 5%. All front-end loads are negotiable between the investor and the advisor. The typical investor pays a front-end load between 4% and 5%, primarily because investors are unaware that this fee is negotiable.

The typical investor in a Canadian fixed-income fund pays a MER of between 1.25% and 1.49%.
The typical investor in a Canadian money market fund pays a MER of between 0.40% and 0.89%.
The typical investor in a Canadian equity fund pays a MER of between 2.00% and 2.50%.

Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the fees because they don’t know how low these fees should actually be. Assets tend to flow into average- or higher-fee funds because Canadian investors use financial advisors to help them make decisions. Advisors direct client assets to funds that pay better trailers. And since the trailer is included in the MER, the result is that assets flow into higher-fee funds.

Why would Canadian investors put up with such high fees and experience a severe wealth-loss by investing in such high-fee funds? Keith Ambachtsheer and Rob Bauer provide one explanation in this paper (thanks to The Wealthy Baker for the link):

Mutual funds are sold, not bought: the market for investment management services is highly asymmetric, with the buyers of these services knowing far less about what they are buying than the sellers know about what they are selling. Information economics
predicts that in such a market buyers will pay too much for too little. Research results from the field of behavioural finance support this conclusion. This research shows people to be generally unsophisticated, inconsistent, hesitant, and even irrational regarding financial matters, which creates the opportunity for the for-profit financial services industry to proactively step in and sell their products and services at too-high prices. The veracity of this third explanation is supported by the findings of a recent survey of 1865 Canadian mutual fund investors. When asked why they had bought mutual funds, 85% said they were persuaded by “someone who provided me with advice and guidance.”

In my limited experience, not only do Canadian investors pay too much in mutual fund fees, they also receive too little in return. Many advisors simply sell mutual funds and offer nothing else: no financial plan, no asset allocation strategy, no investment policy and no tax planning.

This article has 32 comments

  1. In addition, there are usually yearly management fees to offset the cost of the built in stock market research and the fund manager’s salary. Mutual Funds

  2. Wow. This article describes PRECISELY my own personal experience early on in my career when I started working and had no knowledge of the asset management industry. I was a young eager engineer who was focusing 100% of my attention on my new career and I entrusted my Group RSP plan to a so-called “investment professional” who put me into all of the mutual funds that maximized THEIR return from my pockets. I only grew suspicious after a few years when I noticed that my RSP portfolio underperformed the market – when the overall market fell, my funds fell further, and when the markets recovered, my funds were flat-lining. I asked myself “what the f#@& is going on here?” and hence began many years of research and doing my homework on my investments. I would have to say that if I hadn’t been getting ripped off by my investment advisor, I may have never become the investor that I am today.

    Today, the only remaining mutual funds in my portfolio are the worst apples in the whole darn bunch – Labour Sponsored Funds. Yesterday, BNN had a very interesting segment on Canada’s Venture Capital investment statistics and it painted a very dire picture of venture capital investment in Canada. The trend over the past few years has seen double-digit declines in venture capital investment in Canada. We invest huge amounts of money into R&D, but that money is wasted because those technologies either never make it to market, or are taken to market by foreigners. In comparison, venture capital investment in OTHER industrialized nations have been increasing year-over-year, so we’re falling behind. If we took this trend and continued to extrapolate, then eventually Canada would become a country of low-tech branch offices of other multi-nationals – the “next RIM” will never be born in Canada… This trend is very troubling.

  3. Was a great report, which I’m sure Canadians will forget about quickly as we never complain 🙁

    BTW its Morningstar (no capital on the S)

  4. Preet highlighted a regulatory issue as well in his blog last week which drills down on the Morningstar analysis. There are far more people qualified to sell mutual funds who cannot sell ETF’s. Here is the post:


    Even assuming fees were similar between the two products, the distribution channels dictate that mutual funds will be sold in far greater proportion than ETF’s.

    Given an over-whelming control on distribution channels provided by a byzatine and out-dated regulatory model in Canada, the mutual fund industry is acting rationally by jacking up fees. What’s the alternative?

    In other words, our own governments are throwing fuel to the fire.

  5. CC, I think you’re expecting too much of lowly mutual fund salespeople. To be qualified to sell mutual funds in Canada, you only need to pass the “Investment Funds in Canada” course or the “Canadian Securities Course” (both provided by CSI, previously known as the Canadian Securities Institute). I’ve taken the CSC. It was a cakewalk. Even investment advisors only need to take the CSC and the Conduct & Practices Handbook course (they also need to be sponsored by their IDA-registered employer).

    Your average mutual funds salesperson and investment advisor probably won’t know much about tax issues, or be good at coming up with a financial plan. For that, you probably want to go to a financial planner that holds the Cerfitied Financial Planner certification or an accountant. In all likelyhood, you won’t be able to get all the financial advice one needs in a single location.

  6. Isn’t that the case with other institutions like banks? Frankly, I was shocked to see the “monthly fees” charged by the big 5 banks to get a “privilege” to hold our money. Even then, they would nickel and dime for every cheque deposited, withdrawals etc. And yet, majority of Canadians bank with them.

    Most of the time, people are not aware of the choices available. And these companies continue to thrive on the ignorance of people. Cable, internet, home phone …. the list goes on …

  7. Canadian Capitalist

    Phil: Same story here. The only time I bought mutual funds from an advisor, I got funds that were profitable… for him! I did dump the venture capital fund last year. Good riddance!

    Thicken: Preet also made an important point. Nobody is saying advisors shouldn’t be paid. After all, the good ones provide a valuable service and should be compensated for it. What beats me is why many of these advisors put their clients in high-fee funds when their own compensation could be higher if their clients earn more. I don’t know the answer though.

    Robillard: There is certainly a role for regulatory agencies here. There should be minimum benchmarks for investment advice. Maybe expecting tax planning is too much, but a basic financial and asset allocation plan should be mandatory.

    Ash: Of course. That’s the whole purpose of blogs like this. To show, other low-cost, less-advertised options that are available out there. But there is also an element of personal responsibility here: Canadians should wake up and actively support low-cost alternatives.

  8. “Frankly, I was shocked to see the “monthly fees” charged by the big 5 banks to get a “privilege” to hold our money. Even then, they would nickel and dime for every cheque deposited, withdrawals etc. And yet, majority of Canadians bank with them.”

    Otherwise PC Financial would be the biggest bank in Canada. People are just ignorant and don’t know any better.

    This is why they should implement mandatory high school personal finance courses. Explain how bank accounts work, cheques, mutual funds, ETFs, stocks, MERs, etc. It would certainly be more useful than many other subjects that were mandatory.

  9. Xenko: You are so right… but it will never happen. Call me conspiracy theory lover but let’s not forget for a second who makes the rules, and the banks are.
    I was reading some very troubling articles about how for instance in US, the whole congress is in the pockets of Wall Street and then everyone is surprised that everything they do in this so called crisis benefits the banks, bankers and the big boys on Wall Street.
    You are so right that people are so ignorant that for them is like… “i would feel bad not to take their money” line of thinking 🙂
    But again something in the system should protect the ignorant people no? Everyone thinks they are so happy watching american idol and don’t pay any attention to what really is going on with them. But I guess that was the way of the world always.

  10. (Disclosure – I am an advisor and I think there are a few, say 10-20, really good mutual funds in Canada – there is tonnes of crap)

    I won’t win any friends with this comment, but I can’t help myself…. you guys all sound the same to me and you sound pathetic.

    You go one about how you were duped by an advisor, and found out you were sold bad funds. Take some responsibility for yourself!!!!!

    The problem was YOU were a terrible buyer of financial advice and products. I repeat, that was the problem.

    Realize that in EVERY industry the vast majority of salespeople are looking out for themselves. Why would finance be any difference?

    The industry will NEVER be regulated as effectively as is needed to protect people from ignorance. The only solution is for investors to become better purchasers of financial advice. Period.

    If investors are better purchases of financial advice – they will get more value in return – either doing it themselves, or finding the good advisors that are out there (there are some).

    It is so Canadian to simply wish, hope or expect that some central planning force will protect everybody from a bad experience. People need to wise up.

    Fortunately, CCs site helps them do that, but c’mon…..own up to your end of the problem.

  11. Leading Edge Boomer

    Well I guess the moral is –buy the banks and other financials when their dividend yield is high. Don’t buy their mutual funds. Let others do that, and let others provide the banks with lots of revenue, so that the banks can afford to pay us those nice high dividend yields.

    ” One’s outlook depends on whose ox is being gored”
    Old saying by Anon.

  12. Something is wrong with Morningstar’s weights on the categories if Canada can get an F on fees and a B-minus overall.

  13. Canadian Capitalist

    Rob: While I agree with you that consumers must wise up (and I blame myself for uncritically accepting “advice”, the one time I did business with an advisor), the level of competence of the average advisor leaves a lot to be desired. This where the regulatory systems should do a better job. Finding a good advisor should be relatively easy, not like looking for a diamond in a haystack.

  14. Rob: The insurance industry is also chock full of scam artists. Is it reasonable to expect some snot-nosed kid fresh out of school eager to pursue his brand new career to also be an expert in the asset management and insurance industries? Especially if your employer sets you up with a Group RSP plan and they assigned you an investment manager? Why would a 21 yr old kid who is not in the financial services industry think that an employer sponsored and recommended investment manager in a Group RSP program going to his place of work is there just to rip him off?

    Clearly after getting older and wiser, I learned to shun the asset management industry and I’m now almost out of all of my mutual funds. But that only came after years of spending my leisure time reading boring materials. These days we have the internet (which is also full of lies) – but back when I first started out, it involved a lot of time at the library and bookstore.

  15. Do you have a guideline of how much fee is reasonable for different types of mutual funds?

  16. Okay CC and Phil S – you both make good points. Too bad, I was on a pretty good rant there.



  17. Rob
    (Disclosure – I am an advisor and I think there are a few, say 10-20, really good mutual funds in Canada – there is tonnes of crap)

    Would you be able to list those 10-20 picks. I will be debt free at the end of this year and would like to start my rrsp etc. I’m not sure if I will be going into mutual funds. But I’m doing my research research research in advance. Thanks.

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  20. Wow, Canadians should then stick to US mutual funds.
    If you payd over 0.30% annually on a fixed income or money market fund you are getting a pretty horrible return.. Ouch..

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  22. Shadow_6 – I could but these names can change so what is good today, may not be good tomorrow – better for you to learn what makes for good active management so you can improve your odds considerably. Let me steer you in this regard.

    Read Chapter 10 of David Swenson’s book Unconventional Success (should be at the library but worth the cost) and you’ll be well on your way to easily being able to weed out most of the garbage out there.

    Hope that helps.

  23. This is why I’m dumping my current mutual fund – with an MER of 2% – and going into stocks.

  24. Improved POS disclosure [ currently underway by CSA ]will help but I think forcing firms to provide account statements that break out fees and provide PERSONALIZED rates of return will be an eye-opener for even the most complacent retail investors


  25. Folks, yes mutual funds are expensive in Canada but we can all recognize that its a question of economies of scale. We do not have the asset size compared to the US. Regardless there is a right & wrong to this argument. 1st of all, Advisor need to get paid for giving advice, at least the ones that do the research & actually give good advice, secondly, more than 80% of Canadian mutual funds are closet indexing funds. I do not care care how they pitch it to you, they are not active enough. Most (not all) Fund Portfolio managers are comped based relative to an index. That doesn’t really align their interests with that of the investors. When constructing mutual fund portfolios, advisors should really consider the following: use highly active mutual funds & get your clients moneys worth. There are not many, but there are highly active funds in Canada, with track record that have beaten their proxy without looking too much like it – that’s the idea. Another suggestion, use a passive/active startegy if you will where you pair up ETFs with active funds. This way clilents are getting bang for their buck.



  26. I agree that the industry needs changing, but not all advisors are the same. Here at RBC, financial planners provided a whole range of services from asset allocation to complete financial planning. No fees are charged other than the MERs of the funds and we have the ability to find funds with lower MERs. We do not charge any loads either, there is real value here for those who need the service of a planner. We can be unbiased in our approach because we do not have to worry about trailer fees. We receive a base salary and bonus depending on our ability to do what is right for our clients. You get low price with top notch service – just not romantic to invest with a bank.

  27. On top of MER’s there are the transfer fees, like Mackenzie who charges $500 to move two accounts. ETF are far better and allocation is more important, by the index cheap and hold. Forget these fund mangers @ 2% a year that is costing 20% over 20 years on a 100000 portfolio that is $20000!

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