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Average costs for Canadian advised investors remain comparable to those of U.S. investors, study finds

By James Langton |

 

The average cost of owning actively managed mutual funds sold by advisors has declined over the past couple of years, as the industry responds to competitive pressures, according to a new report published Wednesday from the Investment Funds Institute of Canada (IFIC).

The report, Monitoring Trends in Mutual Fund Cost of Ownership and Expense Ratios – A Canada-U.S. Perspective, 2017 Update, was commissioned by IFIC to update an in-depth study published in 2012 that examined the relative costs of mutual fund ownership in Canada and the United States. The study was last updated in 2015.

According to the report, which was commissioned from Toronto-based research firm Strategic Insight, the average cost to advised investors of owning actively managed mutual funds has dropped six basis points (bps) in Canada since 2014 to 2.14% at the end of 2016.

The average cost declined through reductions in management fees, expenses, and other fee cuts, the report says, along with the introduction of programs that offer cheaper versions of funds to investors that meet minimum asset levels.

"Strategic Insight's 2017 analysis confirms that market forces are exerting downward pressure on fund fees to the benefit of investors," says Paul Bourque, president and CEO of IFIC, in a statement.

Comparable costs

The report also argues that the cost of owning mutual funds is comparable between Canada and the U.S., at least for investors that use advisors.

It stresses that one of the fundamental differences between the fund industry in Canada and the U.S. is that the Canadian industry generally uses embedded commission structures, which impose trailer fees to fund the cost of distribution.

American investors typically pay for advice and service outside of the fund itself. So, although the total expense ratio of an actively managed mutual fund in the U.S. averages between 60 and 80 bps, the external cost of advice pushed the overall average cost up to an estimated 1.95% at the end of 2016.

"When compared head-to-head, the average [cost of ownership] of funds was 19 bps higher in Canada than in the United States at the end of 2016. The difference is largely reflected in the taxes levied on embedded costs and other fees. If taxes are excluded, the average Canadian cost of ownership is 1.96%, nearly equal to the estimated average in the United States," the report says.

These estimates only reflect products sold through advice channels, the report acknowledges.

"The overall cost of ownership declines considerably (particularly in the United States) when funds that are purchased without advice, such as through employee-sponsored retirement plans, online/discount brokerages or directly from fund manufacturers, are included," it says.

The research also excludes passively managed funds, and exchange-traded funds (ETFs).

In terms of industry asset growth, for the two-year period ended December 2016, mutual fund assets in Canada grew by 8.4% annually, adding almost $200 billion in assets over the two years, the report finds.

Almost half (48.8%) of the asset growth came from inflows of new money, with the rest generated by market gains.

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