A new report from the Investment Funds Institute of Canada (IFIC) concludes that mutual fund costs are more or less the same for investors in both Canada and the U.S. If that’s true, then Canada’s mutual fund industry should have no trouble abandoning its defence of embedded compensation structures.
The report, issued earlier this month, states that the average cost of owning actively managed mutual fund units through a financial advisor is about the same on both sides of the border. As of the end of 2016, the average cost to Canadian investors is estimated at 2.14%, vs 1.95% for U.S. investors. The report adds that the difference is largely a result of taxes. If taxes are excluded for Canadian investors, the average cost drops to 1.96% in Canada.
The big difference between the U.S. and Canada is in our use of embedded compensation structures. Looking solely at the costs charged by mutual funds themselves, the IFIC report indicates that the cost of owning units in a mutual fund in the U.S. is between 60 and 80 basis points (bps). When you factor in the cost of advice, typically charged outside the fund and running at 100 to 150 bps, U.S. investors pay about the same as Canadian investors. If these numbers are accurate, why does the Canadian mutual fund industry continue to support embedded compensation structures?
Regulators have made a good case that these structures pose irredeemable conflicts of interest, hamper investor returns and distort the market for advice. There are sound policy reasons to ban these compensation models and require that firms charge investors directly for advice. Apparently, U.S. advisors are able to do this without scaring off clients.
Yet, the mutual fund industry in Canada opposes regulatory action that would eliminate the conflict and put investors and advisors into a more straightforward commercial relationship. But if, at the end of the day, investors truly end up paying the same as in the U.S., whether they’re charged inside or outside of a mutual fund – and, by extension, advisors end up earning about the same in both systems – there’s no justification for the embedded fee model. Canada’s industry should cheer the arrival of unbundling and embrace the prospect of a freer market for financial advice.
Read the response to this editorial from the Investment Funds Institute of Canada: No silver bullet for conflicts
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