Mutual fund fees in Canada are trending lower. Heightened cost disclosure and intense competition from a rapidly growing range of low-cost ETFs have triggered waves of fee reductions by mutual fund companies in recent months.
“Since January 2015, firms representing 90% of assets under management [AUM] in the [mutual fund] industry have announced fee cuts,” says Paul Bourque, president and CEO of the Investment Funds Institute of Canada (IFIC) in Toronto. “It’s a very broad trend.”
Although this trend has been underway for several years, it has accelerated since December 2017. That month, three Toronto-based mutual fund companies – Sun Life Global Investments (Canada) Inc. (SLGI); RBC Global Asset Management Inc.; and Manulife Investments, a division of Manulife Asset Management Ltd. – and Montreal-based Desjardins Investments Inc. announced cuts in management and/or administrative fees on certain mutual funds. The amount of the reductions varies among funds and series, ranging from five basis points (bps) to 55 bps.
The latest round of cuts to fees builds upon previous reductions. A report that IFIC released in October 2017, which was based on research conducted by Toronto-based research firm Strategic Insight Inc., states that the average cost of owning units in an actively managed mutual fund dropped by six bps to 2.14% between 2014 and the end of 2016.
The downward shift in fees is good news for clients, says Mimi Lee, financial advisor with TruFinancial Consultants in Markham, Ont., which operates under the umbrella of Mississauga, Ont.-based Carte Wealth Management Inc. “It’s always good to have lower fees,” she says. “If companies can trim whatever they are spending and put that money back into consumers’ pockets, that’s always a good thing.”
Many factors are contributing to the decline. For one, the growing regulatory focus on fee disclosure and transparency has led to greater awareness of fees among investors. That’s prompting many companies to re-evaluate the fees they charge.
“People are seeing how much they’re paying more clearly than ever before,” Bourque says. “We believe that’s generating more discussion between clients and advisors around fees and what clients are getting for the fees they pay.”
New cost-disclosure requirements recently mandated under the second phase of the client relationship model (CRM2) pertain only to distribution costs rather than to management fees and other fund costs.
However, Rick Headrick, president of SLGI, anticipates that the disclosure requirements eventually will be extended to include the full cost associated with an investment product. Accordingly, the recent fee cuts probably have been motivated, in part, by fund companies’ efforts to prepare for that new reality.
“I do believe that the industry needs to get to a place in which the entire management expense ratio is disclosed on the statement,” Headrick says.
The proliferation of lower-cost ETFs also has been a key factor in the decline of mutual fund fees, says Dan Hallett, vice president and principal with Oakville, Ont.-based HighView Financial Group. Specifically, actively managed and factor-based ETFs have emerged, and these products look similar to mutual funds yet carry considerably lower fees.
“[The new ETF categories] really are trying to do the same thing [as mutual funds] at a high level,” Hallett says, “but one [asset class] is significantly cheaper.”
With so much more competition in the investment fund space, Hallett says, “it’s not as easy [for mutual fund companies] to get inflows as it used to be, even in a long, extended bull market.” Cutting fees, he adds, is one way for companies to attract AUM in such a highly competitive landscape.
Hallett says he’s encouraged to see mutual fund companies competing on price. Although price wars have been common among U.S. mutual fund companies, fees in Canada haven’t seen much movement historically.
“Until the past five years, there was almost zero price competition among retail mutual funds in Canada,” Hallett says.
For some mutual fund companies, the ability to reduce fees has stemmed from growth in AUM, as strong market performance and industry consolidation have helped to enhance economies of scale.
“If you look at most of the fund companies that have made moves [on fees],” Headrick says, “a lot of them have enjoyed [AUM] growth because markets have been friendly.”
In SLGI’s case, the recent move to reduce mutual fund fees was triggered by economies of scale that materialized when the company’s AUM recently surpassed the $20-billion mark, he says.
“In the asset-management business, a lot of your costs are fixed. So, as you grow your AUM, your expenses aren’t increasing at the same pace,” Headrick adds. “So, there’s an opportunity to share [the cost savings] with investors.”
More cuts in mutual fund fees could be forthcoming – especially if consolidation in the industry continues, Headrick adds: “I wouldn’t be surprised if there are more [fee reductions]. With acquisitions comes increased scale. So, you may see [the resulting cost savings] being passed along [to investors].”
These cuts to mutual fund fees could trigger a higher level of inflows into mutual funds, Headrick says. However, he points out, fees should not be the only factor advisors and their clients consider when selecting an investment vehicle.
“I would hope that investors and their advisors are not just chasing lower fees,” Headrick says, “because, ultimately, it’s the investment performance and meeting your objectives that count.”
Lee agrees that clients should avoid getting too fixated on fees and that the overall level of returns should be a more important consideration. “If you have a product with really low fees, but it’s not making you money, does that make sense?” she asks.
Although lower fees are a positive development for clients, Lee is concerned about the impact that declining revenue could have on the resources that mutual fund companies have to spend on research and talent.
“I’m hoping that [fund companies] are maintaining the level of services and research necessary to maintain strong products,” she says.
In Hallett’s opinion, the cuts to fees haven’t been substantial enough to have any detrimental impacts on the quality of products. In fact, further cuts are feasible, he says: “The very large companies may have some room to squeeze more efficiencies out of their cost structure.”