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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.
