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Investors compare fees at dinner parties, says Shannon Lee Simmons, who founded the New School of Finance in Toronto.

The Globe and Mail

'Follow the money," said Watergate informant Deep Throat to Robert Redford's Bob Woodward in All The President's Men.

In the less cinematic world of retirement savings, an apt line could be "follow the fees."

Compared with most mutual funds, exchange-traded funds, or ETFS, usually have lower fees.

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In fact, financial planner Shannon Lee Simmons at her Toronto-based company the New School of Finance believes that lower fees for ETFs override all other considerations for most people.

"People talk at dinner parties, and they say things like, Oh man, you're paying 2.5 [per cent in annual fees for a mutual fund]? I'm only paying [a lower per cent] for my ETF," Ms. Simmons said.

"There's a lot of fee-shaming going on."

Mutual funds typically have all sorts of costs ranging from sales commissions to redemption and management fees.

Funds with more oversight, such as environmentally or socially minded investment funds, tend to have even higher management fees, and they can eat into returns.

"What I would like to see are actively managed mutual funds with much lower investment management fees. There's no need for a mutual fund to be 2.5 to 3 per cent. It's ridiculous," Ms. Simmons said.

But she warned that ETFs, which are a collection of assets like a mutual fund but trade on exchanges like a stock, can also have fees, trading fees in particular. A new breed of actively managed ETFs, rather than those that simply mimic a stock-market index, can have higher fees.

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Yet many investors don't mind. "The stock-like behaviour is a big attraction for people who are trading regularly and actively," said Tea Nicola, co-founder and chief executive officer of WealthBar Financial Services Inc., a full-service online financial advising firm in Vancouver.

When a mutual fund and an ETF are basically the same basket of assets, however, fees will make all the difference.

"That's what gets the conversation started, in my experience. It's the fees. Other considerations such as tax efficiency are less of an incentive," said Ms. Simmons.

Some of the tax advantages lie in the fact that index-mirroring ETFs have a low turnover in the investments they hold, resulting in fewer taxable capital gains. It's a moot point, though, Ms. Simmons argued, for long-term investors who have their investments in tax-deferred RRSPs and tax-free savings accounts.

Fee comparisons are also a factor for do-it-yourself investors, especially among millennials with their high comfort level with technology. These investors, of whatever age, can buy ETFs online through a brokerage or adviser, or an automated robo adviser (basically an algorithm that slots money into certain investments based on someone's investing preferences).

Still, the uptake for ETFs in Canada has been relatively slower than in the United States. "The ETFs have replaced entirely the top 10 funds in assets under management in the States, whereas in Canada, it's still mutual funds," Ms. Nicola said. "U.S. analysts are shocked as to how slow the movement has been in Canada from mutual funds into ETFs, whereas in the States, that switch has already happened."

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She attributed this to Canadian banks and their mutual funds having such a large share of the investment market and the banks' slow move into ETFs. But she added that the shift is just a matter of time, particularly once fuller disclosure rules for mutual funds – including greater transparency concerning fees – come into practice starting this summer.

The generally lower fees on ETFs are related to the passive investing style of most ETFs, as opposed to the active management of most mutual funds.

"If you're with an adviser in a typical adviser relationship, and you're paying fees, but you have ETFs, what are you paying for?" Ms. Simmons asks. "Are you paying for a financial plan annually? Are you paying for a meeting? Are you paying for discretionary management?"

That's not to say Ms. Simmons is completely against mutual funds.

She sees a case for ETFs and more actively managed mutual funds sitting side by side in a portfolio. Yet the costs have to be comparable.

"I think there is still a place for active management. I think it needs to be at a reasonable fee," she said.

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