Nobody likes paying fees. Yet those pesky charges seem to be attached to every service – particularly anything related to money management – that Canadians rely on to save and grow their nest eggs.
The Canadian Labour Congress has developed an online calculator that shows Canadians just how much of their savings can be gobbled up by management fees ranging from a very low 0.5 per cent to a very high 2.5 per cent. The CLC accuses the financial management industry of "gouging" Canadian investors.
"Management fees can have a huge effect on the outcome of savings," said CLC president Ken Georgetti, adding that Canada has among the most costly expenses in the world.
According Chicago-based Morningstar Inc., an independent investment research company, Canada had the highest mutual fund costs of 22 countries surveyed, though the industry here disputes its findings.
Morningstar's report released earlier this year gave Canada a failing grade on fees and expenses, which ring in at up to 2.31 per cent, compared with 0.94 in the United States.
"Among the 22 countries in this survey, Canada has the highest annual expense ratios for equity funds, the third highest for bond funds, and tied for the highest for money-market funds," the report noted.
The Canadian Foundation for Advancement of Investor Rights or FAIR Canada complained that under the current regulatory environment, there's limited price competition and demanded that Ottawa look into the high cost of investing. Federal Finance Minister Jim Flaherty said he would ask the Senate national finance committee to investigate, and FAIR hopes it will be invited to make its case early next year.
Marian Passmore, FAIR's associate director, noted that economies of scale is not an explanation for the disparity as countries smaller than Canada don't have such high fees.
"Given the low rates of return right now, it's obviously of concern to investors," she said. "People don't understand that over time, it eats into to your investment and savings."
The CLC spells out exactly what various management fees do to an investment. The organization shows what happens to an initial investment of $10,000 at a 5-per-cent annual compounded rate of return once various management fees are attached.
Take the low 0.5 per cent management fee on a $10,000 investment:
After 10 years:
The investor has $15,570.43; the money manager, $718.51
After 45 years:
The investor has $72,066.60; the money manager, $17,783.48
Compare that to a high, 2.5-per-cent management fee on a $10,00 investment at the same rate of return:
After 10 years:
The investor has $12,969.84; the money manager, $3,319.11.
And 45 years:
The investor has $29,493.18; the money manager, $60,356.90.
Mr. Georgetti calls it a "scandal," especially when one considers that only 39.2 per cent of workers were covered by registered pension plans in 2009, according to the latest figures available from Statistics Canada. That leaves many Canadians on their own to save for when they're not working through Registered Retirement Savings Plans, mutual funds and the like.
The CLC, which represents 3.2 million workers, advocates improving the Canada Pension Plan as a more efficient way to save for retirement. It argues that the CPP Investment Board boasts a really low management fee in part because of the size of the fund. (CPPIB doesn't disclose its fee as a percentage, but as of March 31, 2011 its external management fee was $500-million on the $148.2-billion it managed.) The federal New Democrats lobbied to increase CPP benefits, which could hike premiums, but an overhaul isn't imminent. Ottawa was going to look into it, but instead recently introduced voluntary Pooled Registered Pension Plans to cover millions of Canadians without workplace pensions. Changes to CPP require two-thirds of provinces representing two-thirds of the population to agree and not all provinces are on board anyway.
It's too bad, Mr. Georgetti said: "The most efficient way to make sure Canadians have basic, adequate pension is to lift the CPP up."
The Investment Funds Institute of Canada, which represents the investment funds industry, including fund managers, disputes the Morningstar analysis of management fees as well as the CLC's position.
Jon Cockerline, the institute's director of policy and research, said the Morningstar report doesn't compare "apples to apples" and pointed out that management fees are disclosed and comparable to products available in other countries.
"There's substantial value embedded in that advice component," Mr. Cockerline added.
The institute issued a report in November which found that the net worth of individuals, taking into account age and income, is almost three times higher for those who receive investment advice ($555,447) than those who don't ($191,743).
Mr. Cockerline also said the average mutual fund rate of return is higher than 5 per cent that the CLC assumes in its online calculator and that's after the management fee has been deducted.
"It would be unfortunate if investors were guided to the view that a government program could be counted on to provide a better retirement outcome than plans that are built individually for an investor through an adviser," Mr. Cockerline said.
Barbara Amsden, a director with the Investment Industry Association of Canada, said while management fees aren't always transparent in Canada, things are moving that way with new requirements from securities regulators.
Ms. Amsden also noted that investing should be balanced to include Retirement Savings Plans to give people flexibility. Canadians just need to be more informed about the fees attached to their investments.
"Absolutely, Canada Pension Plan is the most secure way," she said, "But what are the things that you potentially lose by going all in the Canada Pension Plan and not in the RSP?"
Editor's Note: The seventh paragraph of this blog post has been changed from an earlier version, which contained inaccurate information relating to the Senate national finance committee.