Policymakers should either open up the Canadian mutual fund industry to foreign competition, or regulate their fees, says investor advocate and independent financial analyst Diane Urquhart.
In an updated analysis, Urquhart concludes that about half of investors will have their returns eaten up by fees over 30 years. She finds that if Canadian fees were closer to the world average, Canadian investors would have almost 25% more in retirement savings.
Her analysis assumes a 6% average annual return over 30 years, an average total expense ratio (TER) of 2.2% in Canada, and a 0.95% TER in the rest of the world. Those estimates are drawn from a 2007 academic paper Mutual Funds Fees Around the World.
As a result of her findings, Urquhart recommends that the fund industry either needs more competition, or tighter regulation. “The solution is for Canadian governments to permit Canadians to buy foreign sponsored mutual funds, which charge about half of the Canadian sponsored mutual fund fees. This would involve removing the requirement for foreign sponsored mutual funds to become Canadian registered,” she suggests.
A second choice she recommends it to regulate Canadian fees like utility rates. “If Canada intends to remove marketing boards and the quota system for dairy and poultry products, then it should surely be opening the marketplace for mutual funds to international competition first,” she adds.
The Canadian fund industry has disputed the conclusion that Canadian fees are much higher than in the rest of the world, and specifically criticized the findings of the Mutual Funds Fees Around the World paper by Ajay Khorana, Georgia Institute of Technology; Henri Servaes, London Business School; and Peter Tufano, Harvard Business School. The authors of that paper stand by their conclusions.
Last year, the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), called on Finance Minister Jim Flaherty to include mutual funds in a proposed examination of price disparities between Canada and the United States. The investor advocacy group suggested that limited competition is one of the reasons for the disparity, and called on the Canadian regulatory system to bolster competition.
Securities regulators are planning to publish a discussion paper later this fall that examines the issue of investment fund fees.