The cost of ownership (CoO) of Canadian mutual funds is comparable to that of U.S. mutual funds, according to a recent study by the Toronto-based Investment Funds Institute of Canada (IFIC). The study offers Canadian financial services industry members and regulators food for thought in the vigorous debate on mutual fund pricing structures.
"Our intent with this comparison study was to bring some real facts to the table," says Joanne De Laurentiis, IFIC's president and CEO. "If regulators are intending to make any major changes, then we really should be basing them on good, solid facts."
The IFIC study was designed to present a picture of the total cost of fund ownership, one that reflects more than sales commissions or management expense ratios.
The current conversation around fees, fuelled in part by the perception in some quarters that Canadian funds are more costly, was brought to the forefront in a December 2012 report by the Canadian Securities Administrators (CSA). That report looked at the current embedded fee structure of Canadian mutual funds and raised the question of potential conflicts of interest and possible solutions, including the creation of a U.S.-style unbundled structure. As well, the Ontario Securities Commission has scheduled a roundtable discussion on the topic in June.
To get an accurate picture of the true CoO of Canadian and U.S. funds, respectively, IFIC hired Toronto-based Investor Economics, a division of Strategic Insight (SI), an Asset International Company, to conduct the research for the Canadian portion of the study, and the New York office of SI to look at fund ownership costs in the U.S.
The CoO includes: a fund's acquisition costs (front-end load sales commission, other transaction and account-opening fees); ongoing costs (embedded fees, such as fund management, trailers, operating expenses and taxes, and unbundled fees such as fees-for-service and administration costs); and disposition costs (redemption fees and other transaction costs).
The study found that when external fee-for-service charges are taken into account, U.S. mutual fund fees are roughly equivalent to those charged by Canadian funds - and may be higher, depending on the fees charged by financial advisors.
For example, the study noted that the CoO for a Canadian "advice channel" mutual fund is roughly 2.21%, while the average CoO for a U.S. fee-for-service structured fund is 2%. However, the CoO for a U.S. fund could be as high as 2.4% because the external fee-for-service charged by an advisor can be 1%-1.5%.
The study also found that Canadian mutual fund fees have declined over the past five years. That drop is based on a number of factors, says Goshka Folda, fund-sector research guru with Investor Economics in Toronto, including the increase in the use of no-load funds; growing interest in relatively low-cost fixed-income funds and competition from other products, such as exchange-traded funds.
Folda expects this downward trend to continue. "I cannot put a specific number on how much [fees] will decline further," she says, "but I would say the only way to go is down."
However, the debate around mutual fund fees cannot focus on price alone, says Dan Hallett, vice president and director of asset management with HighView Financial Group in Oakville, Ont.
The move toward a fee-for-service model in Canada is not about price; rather, it's about transparency and accountability.
"It's really been about improving transparency so that clients can see, first of all, that they're paying something and what it is that they're paying," Hallett says. "When you create better transparency, you create better accountability on the part of the advisor."
As well, Hallett argues, the fee-for-service model does offer investors cost-saving opportunities - at least, in the high net-worth segment. For example, under the current mutual fund model of embedded fees, says Hallett, there is not much difference for an investor with $100,000 in investible assets vs someone with $500,000. However, in the fee-for-service model, there often is a fee scale in which fees start to drop significantly for investors with invested assets above a certain benchmark - generally about $250,000.
However, that very scale often can lead to lower-income investors losing out on advice, counters De Laurentiis. Now that Britain has banned embedded fees and adopted a fee-for-service, à la carte-style menu, she says, that model is beginning to spawn increased prices and make it harder for individual investors to find advisors.
"What is emerging [in Britain] is a discussion about the 'advice gap'," De Laurentiis says, "and what that's going to mean to the future generations of individuals who may want to be investors."
IFIC is not advocating one pricing model over another. More study and discussion is needed, says De Laurentiis, before any decisions can be made.
In response to the recent CSA report on mutual fund fees, IFIC will submit a response suggesting that the mutual fund sector continue to monitor related events in Britain and Australia - both of which have banned embedded fees - for potentially negative consequences for lower net-worth or first-time investors.
"It is premature to [reach conclusions about] the results of what's going on in other jurisdictions," she says, "because it's just too early. Let's not rush into doing something that may in fact be bad for investors."
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