Canada no longer scores dead last in an international ranking of how much mutual-fund investors pay in fees. But it’s not going to give the cost-conscious much to cheer about.
In a global ranking released last week by Morningstar, both Italy and Taiwan were found to have higher investment fees and expenses than in Canada. That’s an improvement since the previous study was conducted two years ago, even though Canada has only been upgraded to a list of countries grouped together as “below average."
Morningstar says Canada moved up in the rankings because of the increased availability of certain mutual funds that do not include a deferred sales charge, which are early withdrawal fees investors must pay when they pull money from their mutual fund before a set date. Often hidden from consumers, this type of mutual fund has slowly been declining in popularity because of new transparency rules.
Morningstar also cited the declining number of front-load funds that are available, which charge a fee upon an initial investment in a fund.
But Canada still received a low ranking because of the common practice of bundling advice fees with other costs associated with mutual-fund investing. Known as trailing commissions, these are embedded commissions paid by mutual-fund companies to compensate financial advisers and firms that sell their funds. The fees can range from 0.5 per cent to 1.5 per cent.
Fees and Expenses Scorecard
Top and above average markets have lower
asset-weighted median expense ratios and tend
to have investor-friendly approaches to initial
charges and ongoing commissions.
Improved
since last study
Declined
since last study
No change
since last study
New to
study
Top
Above average
New Zealand
Australia
Sweden
Netherlands
United States
Switzerland
Thailand
Britain
Average
Below average
China
Belgium
Denmark
Canada
Finland
France
India
Germany
Japan
Hong Kong
Korea
Mexico
Norway
Singapore
Spain
South Africa
Bottom
john sopinski/
the globe
and mail, source:
morningstar
Italy
Taiwan
Fees and Expenses Scorecard
Top and above average markets have lower asset-weight
ed median expense ratios and tend to have inves-
tor-friendly approaches to initial charges and ongoing
commissions.
Improved
since last study
Declined
since last study
No change
since last study
New to
study
Top
Above average
New Zealand
Australia
Sweden
Netherlands
United States
Switzerland
Thailand
Britain
Average
Below average
China
Belgium
Canada
Denmark
Finland
France
India
Germany
Japan
Hong Kong
Korea
Mexico
Norway
Singapore
Spain
South Africa
Bottom
Italy
john sopinski/the globe
and mail, source:
morningstar
Taiwan
Fees and Expenses Scorecard
Top and above average markets have lower asset-weighted median expense ratios and tend
to have investor-friendly approaches to initial charges and ongoing commissions.
Improved
since last study
Declined
since last study
No change
since last study
New to
study
Top
Above average
Average
Below average
Bottom
New Zealand
China
Belgium
Italy
Australia
Sweden
Canada
Netherlands
Denmark
Taiwan
United States
Switzerland
Finland
France
Thailand
India
Germany
Britain
Japan
Hong Kong
Korea
Mexico
Norway
Singapore
Spain
South Africa
john sopinski/the globe and mail, source: morningstar
Australia, the Netherlands and the United States scored the highest rankings this year, the third time in a row all three countries made top marks in the biennial rankings. Products in these three countries are typically unbundled.
Seeing an improvement to “below average” is not something to celebrate, said John DeGoey, a portfolio manager with Wellington Altus Private Wealth, who termed Canada a “laggard” when it comes to improving fee structures on its mutual funds.
“There is clearly a high correlation between unbundling and low-cost fees,” Mr. DeGoey said. “The three countries with the lowest average cost have all banned embedded compensation. That is not a coincidence.”
The ranking is published every two years and was first completed in 2009 to compare best practices in mutual fund products from 26 countries. It comes three years after the launch of an industry initiative in Canada to tackle the transparency of embedded commissions and allow investors to know exactly how much they are paying for advice in dollar terms. The fees and expense report is the first of four reports to be released this year.
In some mutual fund product segments, Morningstar still found Canada’s fund fees to be the highest of all countries. Canada has the highest median expense ratios for asset allocation funds – which hold various mixes of stock and bond investments – at 1.94 per cent. For equity funds, it has the third-highest median expensive ratio for equity funds, at 1.98 per cent, and it has the seventh-highest median expenses for fixed-income funds, at 0.99 per cent.
Paul Bourque, CEO of the Investment Funds Institute of Canada (IFIC), said that while the 2019 report has improved by breaking out individual fund fees that are specific in Canada to show averages for commission-based advice, fee-based advice and do-it-yourself funds, the report is still comparing apples to oranges.
“Where we have difficulty with the report, and always have, is the way that they compare jurisdictions that are predominantly bundled commissions with jurisdictions that are predominantly not bundled,” Mr. Bourque said in an interview.
He said a global comparison should also consider the total cost of ownership and investor outcomes, and include the cost of advice for all countries.
A report commissioned earlier this year by Strategic Insight found the average cost of an actively managed mutual fund, including advice, cost investors 2.10 per cent in Canada, compared with 2.30 per cent in the United States and 1.99 per cent in the United Kingdom.
“In our own analysis, when we look at the total cost of ownership – including advice – Canada is very comparable with the U.S. in terms of the MER [management expense ratio] for a balanced fund sold with advice,” Mr. Bourque said.
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Clare O’Hara