Canadian fund costs in line with U.S.

You’ve probably heard it a thousand times: Canadian mutual fund fees are too high — just look to the U.S. for proof. But a new study finds that this nugget of conventional wisdom might be a complete fallacy.

Comparisons of Canadian management expense ratios to U.S. total expense ratios are far too simplistic, according to a study by global consultancy group, Bain & Company, commissioned by Mackenzie Financial.

“We arrived at a more holistic view of the cost of ownership that reflects both the management fees, the admin expenses and the compensation paid for the services that the investor receives from the advisor,” says Antonio Rodrigues, partner at Bain.

“You have to be careful, because the two markets are different in terms of how they structure the fees and compensation to advisors. If you focus on the MER versus the TER, that’s where you make an invalid comparison.”

It is in the compensation where the confusion over cost arises. In Canada, most advisors are compensated almost entirely through the trailer fee, which is paid from the MER. Front end load charges are waived in about 95% of purchases, Rodrigues says.

In the U.S., the front end load cannot be waived as it is defined in the prospectus of the fund.

“They have to do that because in the actual total expense ratio (TER) that is reported in the U.S., there is very little in terms of compensation for the distributor,” Rodrigues explains. “It is usually in the form of the 12(b)1 fee, but that’s only 25 basis points, and that’s not enough to compensate your advisor.”

On an ‘apples to apples’ basis, the vast majority of investors in Canada and the U.S. incur a comparable cost of ownership when purchasing mutual funds with the assistance of an advisor, the study finds.

To get the apples-to-apples comparison, researchers focused on funds sold by financial advisors, as the majority of investors on both sides of the border buy their funds through an advisor.

Bain found that for investors with accounts under $100,000, there difference between the two countries is minimal.

Among the 15 largest mutual fund managers in the U.S., cost of ownership for a domestic equity fund ranged from 1.74% to 2.41%. The average Canadian domestic equity fund’s cost of ownership was 2.38% — and would be lower, at 2.27%, were it not for the GST. (Jump to chart)

For international equity funds, Canadian investors were closer to the bottom end of the pricing spectrum. The cost of ownership for the average Canadian investor was 2.51% — 2.39% ex-GST, which would rank the Canadian average fifth cheapest in the field with the 14 largest U.S. fund providers. American cost of ownership ranged from 1.87% to 2.81%. (Jump to chart)

For balanced funds, the cost of ownership among the 14 largest U.S. providers ranged from 1.69% to 2.48%. Canadian balanced fund investors paid just 2.34%, or 2.23% ex-GST. (Jump to chart)

But Canadians really get a deal on fixed income funds, with an average cost of ownership of 1.66% (1.58%, ex-GST). The ex-GST number places Canadian bond funds second in a field with 14 U.S. managers, which carried costs of between 1.41% and 2.01%. (Jump to chart)

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