Over the years, many journalists (and only a few advisors) have lamented the comparatively high MERs charged by Canadian mutual fund companies. To date, the real alternatives for ordinary Canadians involved either “sucking it up” and doing nothing or moving toward a higher allocation in individual securities, exchange traded funds (ETFs) and / or index funds.

As the federal election campaign rages on, the people in the actively-managed mutual fund business have encountered a new opponent – a couple of mainstream political parties.

Both the Liberals and the NDP have made election promises to allow for an increase in the amount Canadians can voluntarily put into the Canada Pension Plan. This is an idea that has also been endorsed by CARP – the Canadian Association of Retired Persons.

In both instances, the reason the parties cite this new direction in public policy is their belief that the CPP is more cost-effective than standard mutual funds. You know you’re gouging consumers when politicians can point out that the (supposedly frumpy) public sector could credibly do a better (Read: More cost-effective) job of helping people prepare for retirement than standard mutual fund options available in the (supposedly lean) private sector.

I met with a prominent national journalist last week who pointed out that ordinary Canadians have always had the cheaper options noted above available to them. He suggested that the politicians are making something out of nothing. I disagree.

There are three main segments of investors in Canada: do-it-yourselfers, people working with an IIROC advisor and people working with an MFDA advisor. The journalist is only correct for those people who fall into one of the first two groups.

Many Canadians who work with a financial advisor do not realistically have the option of avoiding high MERs through either direct securities or ETFs. I’ve seen different numbers but people seem to agree that there are about 90,000 financial advisors in Canada- about 17,000 on the IIROC side and about 73,000 on the MFDA side. Furthermore, many people with modest incomes need advice, so it would likely be counter-productive for them to just ‘cut out the middleman’ as a solution.

I believe the politicians are right regarding their primary rationale (cost). Furthermore, because of what I have stated in the past about the importance of ‘constructive behaviour modification’ and the benefits of mitigating self-destructive behaviour (i.e. people who sell low and buy high), I think the option of topping up CPP contributions is doubly beneficial because it helps to take emotions out of important financial decisions.

By helping people to save more, spend less on investment vehicles and be more purposeful (i.e. less driven by emotion) when setting money aside for retirement, I think a substantial proportion of Canadians would be better off with the proposals being put forward. Remember also that this is being proposed as a voluntary alternative. People who don’t want the option won’t be required to participate.

I’m glad there are some people in Ottawa who are trying to help ordinary Canadians get ahead.

Granted, there are other policy alternatives, like eliminating HST on investment products (which would have the added benefit of providing a level playing field vis-à-vis individual securities) or more stringently regulating the fees that mutual fund companies charge to curb their more usurious tendencies.

Still, I think most fair-minded observers would have to agree that this public policy alternative would be both attractive and genuinely useful to a large number of citizens. I wonder how many financial advisors (who emphatically insist their clients come first) would agree with me about that.

Did you know that in the U.K., advisors are required to inform their clients about the existence of cheaper alternatives?

John De Goey, CFP, is the vice president of Burgeonvest Bick Securities Limited (BBSL) and author of The Professional Financial Advisor II. The views expressed are not necessarily shared by BBSL. You can learn more about John at his Web site: www.johndegoey.com.

Originally published on Advisor.ca
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ETF’s have higher risk and the NET return is lower then the active funds I am using.
Why would anyone use them at all.Unless you
don’t know how to do research. Also, everytime you buy one or sell one most clients are paying a commission again.Unless
it is a fee only account. Then you have another annual fee, if it is fee only.

Friday, Apr 15, 2011 at 1:52 pm Reply



I agree with you that choice is good. The proponents of this suggestion are looking at an aspect “cost”.

As an advisor, I look at cost and many other items, e.g. tax and my client’s tax bracket today and into the foreseeable future. Speaking of tax, most above average individuals have to consider tax in their planning for retirement. The RSP requires a mandated drawdown of funds, resulting in additional tax dollars, and potentially loss of the Old Age Security income. I would presume the additional CPP contribution would require a draw down to eventually get close to depletion of these funds or will the contribution be lost to the government after the death of the contributor? The government in the role of keeping statements etc. for each individual, under two systems will impose a cost to the tax payer – is this what all Canadians want or the majority want? Will we receive guarantees for these funds and will future generations pay for the shortfall when investments do not keep up with requirements to make payments of this extra contributions. You may recall that the CPP required an overhaul and that the contributions to CPP increased significantly, along with the change in investment plan – in order to come into its current financial position.

For above average individuals, estate planning involves strategies to deplete RRSPS cost effectively and transfer these savings into other vehicles, often using leverage. Would the CPP overcontribution be fixed with no early drawdown potential? I could go on with many lists of questions. If an individual is working with an advisor there is more than the cost of the MER that is taken into account.

With respect to the cost of the MER, I agree
that our costs are much higher than the USA. I have looked into this and see a co-relation to the size of fund’s assets under management. Generally, ours are smaller, but so is our population base. Start up funds carry higher MERS, long standing funds, such as Templeton Growth carry lower MERS. I have always had a discussion with my clients about the MER and my clients were always made aware of what I would get paid upfront and on trails. Clients do agree to pay for costs of handling their money. Where funds are bought directly, e.g. on line etc. there should be a refund of at least 75% of the trail commissions. I say this to fairly state that the company enabling this facility must pay for the software, security, etc. so 25% of the trails are needed to ensure their continued ability to offer this service.

My concern is simply that the government or CARP is not the vehicle for giving investment advice and the set up of this type of system may not allow an individual an exit strategy once the understanding of the product is known to them and they choose to disassociate from these overcontributions.

Further, we hear time and again that there is a lot of unused RRSP room. Those who cannot afford RRSP – even as GICs, or indexed funds- certainly cannot afford extra contributions to CPP. So who does this venue really cater to?

Thursday, Apr 14, 2011 at 10:38 am Reply


A couple of comments come to mind, especially with respect to advice.

1. If the Enhanced CPP or SRO is ever implemented, as mentioned, any increased contributions would be voluntary. Evaluating such investment vehicles in light of the other options available and determining how much to contribute would sustain the demand for advice, perhaps even increase it. Since there would be no commissions or trailing fees involved, this would only be recommended when in the clients best interest. No problem for a fee-based or fee-only financial planner who performs to a fiduciary standard.

2. While advice from a fee-based or fee-only financial planner requires that the client write yet one more cheque, they are typically going to pay less than they would over time as the embedded compensation in the form of commissions and trailer fees mounts.

3. On the subject of paying trailing commissions to non-advice discount brokerages, at least one has broken free of the pack. Questrade will reimburse mutual fund trailer fees directly to its clients: http://www.questrade.com/trading/mutual_funds_maximizer_trailer.aspx

Patrick Smith

Tuesday, Apr 12, 2011 at 11:36 pm Reply

De Goey

I don’t think I’ve ever responded to other people’s comments before, but this time, I really feel a few things need to be corrected.


I can’t speak for journalists, but speaking for myself, my bias in favour of products that are cheap, pure, broadly-diversified and tax effective. It’s called putting clients first. BTW, my primary product recommendations are mutual funds offered by Dimensional Fund Advisors. Historically, the net returns of cheap products consistently (though not always, obviously) outpace the net returns for expensive ones. Therefore, given that your clients are interested in net returns, will you now recommend that your clients move to cheaper products?


I quoted the Liberals (you know, the people who got rid of the deficit before the current govenment made a mess of things?), the NDP and CARP (the nation’s leading voice for retirees). Hardly a ‘laughable’ lot. No cheap shot at advisors, either. I ASKED (this is a common tactic of mine) advisors to reflect on their actions – and by extension their motives. Wanting advisors to be better is in everyone’s best interests and hardly an attack.


I’ve spoken out strongly in favour of advice (after all, I’m an advisor) over the years. Are you suggesting that since the current structure of the CPP (which I am extremely proud of, BTW) does not involve advice, it should be abolished? The two things about advice are that it be:

a) good (i.e. appropriate for the client); and
b) optional (not eveyone needs advice and I don’t believe that people who don’t want it should be FORCED to pay for it). I’ve written about this many times in the context of MFs paying trailing commissions to non-advice discount brokerages. That’s the thing about the Secure Retirement Option – is an OPTION. People who don’t like the option are free to take a pass. Are you suggesting that there isn’t a single Canadian would could benefit from this OPTION?

Monday, Apr 11, 2011 at 10:34 am Reply