Tuesday, July 14, 2009

Canadian mutual fund industry gets a failing grade for fund fees

Generally, it's not considered good manners to ask people how much money they make. But, with a new study out that criticizes Canada's mutual funds for the high fees they charge, that's a rule you might want to start breaking, at least when it comes to dealing with investment advisors and the products they sell.

The study came from Morningstar USA, a leading independent investment research firm that's widely considered the authority on mutual fund performance.

In this study, Morningstar looked at funds in 16 countries, and the bad news is, when it comes to mutual fund fees, Canada gets a grade of "F" because of the level of our MERs--Management Expense Ratios. These are fees that cover everything from the salary of the fund manager to compensation for the investment advisors, like yours perhaps, who buy these funds for their clients.

Oddly enough, the report didn’t cite specific numbers or averages so I did a little research myself. Depending on the year, I found the average Canadian equity fund has an MER of 2¼% compared to 1.42% for the average American fund.

Now the report does admit that in many countries some costs are not bundled exactly the way they are in Canada, so that may account for some of the difference between Canadian funds and others around the world. And in fairness, we rated up to a B- for our mutual fund industry overall due to the safe regulations in place. But even taking all that into consideration, it still seems that the fees here are higher than elsewhere in the world.

Why should you care about the fees your fund is charging?

The idea of investment in mutual funds is that they take a lot of the worry away that can be associated with investing. Why spend your time and energy trying to pick individual stocks or bonds when you can hand the job over to a professional fund manager? Plus, over 90% of Canadians who invest, own mutual funds.

But here's why these fees matter. When you look at rates of return for mutual funds, you have to remember that they are calculated after the management expense fees are taken off. So the fee represents money that's going to the mutual fund company and possibly to your investment advisor.

Let's look at a $100,000 portfolio earning 6 per cent after fees over 10 years compared to one making 5 percent after fees. The difference over a decade is $13,284 and change. So over the years, even a one percentage point difference in fees between one company or fund and another could have a big impact on the quality of your retirement for example!

I'm not suggesting for a moment that your financial professional should work for free. Everybody deserves fair compensation but the investor should be aware of what those fees are and what their advisor is providing in exchange for advice and planning services.

But what concerns me is that a recent Angus Reid Poll found that of the people who have money invested in mutual funds more than 50% had "no idea" what they were being charged. The industry shouldn't be satisfied with that; they should want their customers to be well informed.

So if MERs and investment fees are new to you or you think you need a refresher, here's three questions to ask your financial professional:

#1 - what am I invested in exactly and why?

#2 - what fees am I paying - for everything - with my investments? And an even better qualifying question would be, If I cashed out everything tomorrow, what fees, if any would I have to pay?

#3 - lastly, every advisor has a bias and is limited by the licenses that they hold. Ask your advisor what theirs are. If they aren't licensed to sell stocks and bonds (only mutual funds for example), chances are they aren't going to recommend them to you.

And if your advisor appears reluctant to answer these kinds of questions?

Don't be afraid to shop around and get a second opinion if you don't get the answers you're seeking. You have a right to know so start with a simply dig out your most recent investment statement and call to your advisor today.

No comments: