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Article-Fund Library: Fees, Fees and more Fees PDF Print E-mail
Don't fret the fees. I have long suspected that if William Shakespeare were alive today, he would have been a mutual fund salesperson. With his keen eye for dramatic irony and exquisite tragedy, he would have thrived in the modern day Gothic-horror levels of persecution and harrowing witch-hunts that today’s financial advisor must brave to ply his craft. Think of the characters he would have to work with! Whether it was the demanding dealer-Shylock insisting on his pound of flesh, the media-Brutus smiling eagerly in front then stabbing viciously in the back, the longwinded regulator-Polonius prattling on about “neither a borrower nor a lender be” (or not without the 22-page Form T5346 completed in tripilicate, anyway) what fate can the poor innocent advisor-Romeo or purehearted broker-Juliet expect EXCEPT to suffer the the slings and arrows of outrageous Fortune[1]? And what choice does the poor client-Lear now have, stumbling blindly about, giving away assets and unable to tell good from bad?? Into this already crowded performance comes three guileless, witless scholars as clever and aware as Rosencrantz and Guildenstern declaiming away about the cost of mutual funds in Canada versus the rest of the world! Alack and aday!  The study, done by Peter Tufano, Henri Servaes and Ajay Khorana examined 18 countries and their “mutual fund” type investments. And concluded that Canadians pay more for their mutual funds than others.  If this be the simple truth of the matter, have it writ down that I am an ass. Let’s look at some qualifying information to cast these comments more clearly into the light of day. Compensation separated out.The first glaring error in the report is that it did not factor into the costs of the funds the separate compensation that most countries’ investors in the report pay to the advisor. The trailer fee paid to advisors of 0.10% to 1.50% is built into the management most of the funds offered in Canada and is something usually tacked on separately in countries by the advisor. Whether this is a better system or not can be debated somewhere else, the fact remains that the true costs of the other countries’ funds need to have an equivalent fee tacked on to be a fair comparison. (This assumes you think the advisor is worth 0.10% to 1.50% of the assets. Being an advisor I am surprisingly convinced this is the case but I fully admit some are not. This is especially clear for investors buying a fund through a discount broker where there is minimal advice. Administrative costs alone would not be enough to justify a high fee…JUST my opinion.) The structure for a solution already exists in this country. It is called the F-class shares. These are mutual funds that have the advisor compensation stripped out of the management fee. The investor then negotiates a sales and trailer fee with the advisor separately. These are the funds that should have been examined in the report to properly level the playing field for the comparison. The problem with this solution is that he F class structure is not going to pay enough for the advisor to work with a small investor. For sake of argument, lets define “small investor” as those with less than $100,000. And Canada has more of those than many of the countries included in the study… Smaller account sizes.Part of the reason funds cost more to Canadians is that more Canadians are able to use them. Many funds in Canada can be purchased for as little as $500 or $25 every three months. The costs of setting up that account and maintaining it and sending that investor all the required documentation through the year far exceeds the 1-3% collected on the account. If a investment firm collects a 2.5% fee on $25 four times a year, they will earn $2.50 annually which has to cover four mailing costs, the envelopes, the printing of reports and prospectuses, staff to create those things and, oh yeah the actual MANAGEMENT of the portfolio, pencils, computers and brokerage fees, etc. One of the indirect criticisms in the report is the fact that distribution of the funds is, somewhat at least, concentrated and dominated by the big Canadian banks. Whenever I end up defending the banks I always hate myself in the morning but the fact remains that the minimum investment size of many funds is due to the banks spreading the practice. This very egalitarian system effectively means that the larger investors in the fund cover most of the costs of the smaller investors in the fund. The elitist response to that, seen in many the other countries and by some managers in this country is to make minimum investment requirements far higher, moving the required investment from $500 to $100,000 or $1,000,000, for example. This would absolutely reduce fund fees but is it the best solution if it denies professional investment to so many Canadians? Home country bias.This is a subtler issue. And one that is not going to please the nationalists. If you live in the US or in Europe, you can achieve excellent diversification by using your own “domestic” stocks. These economies have a wide enough economic base AND they are large enough to be able to support the investment dreams of its citizens. Canada, with something like its 10 Canadian stocks, is not. This means that Canadian fund companies need to invest in global stocks from the US, the UK and other lesser known areas like China, Israel and France –where they seem to have a different word for everything! So either the fund company needs to spend the money gathering the resources for managing overseas stocks OR they need to hire a sub advisor working in the global markets to make the investment choices. Either way there are additional costs created. 

Regulation

The United States has 300 Million people and one securities regulator. Canada has one tenth the population and twelve times the regulators. The funds need to file different papers with each one. That also adds costs. 

Feel the Fees

Could fund fees be reduced and not crater the industry? Of course, just like any industry.Should people who don’t want advisors have to pay a built in fee for them? Of course not, this a clean quick fix that could be implemented easily.Should funds up the minimum investment to reduce administrative costs? Some do that already.Should funds fire sub-managers and invest only locally? Are you nuts??Should the regulators be streamlined? Yes of course. The options should be clearer, the choices broader and the standard applied across the investment/insurance industry so that whether an investor is using a hedge fund, a closed end fund, a mutual fund, a wrap account, a seg fund or an universal life insurance policy they know who they are paying and what they get paid. Before people continue to freak out over the fund fees they need to fully understand what they are getting for their fees and what they need or don’t need. Once that happens, the industry will adapt to meet what the customers want.  


[1] (I am excepting from this my own dealer and regulators who are good and true and wise, naturally…)