Opinion: HST to push mutual funds off the shelf

By John De Goey | August 13, 2009 | Last updated on August 13, 2009
3 min read

There is nothing funny about even higher mutual fund MERs, but MERs are sure to rise next summer. The Harmonized Sales Tax (HST) slated to come into effect in July 2010 in Ontario (where the lion’s share of IFIC member firms are located) will be the cause.

I confess that I find the comments from mutual fund companies regarding the HST to be rather amusing and more than a little ironic. Many of the same firms that have some of the highest MERs anywhere are now critical of the government for harmonizing taxation because it will increase MERs.

I have been an advocate of keeping costs down to achieve better investment returns for some time, but also appreciate the broad recognition that economists have accorded to harmonized taxes as making good public policy sense.

It amazes me that some companies can charge the amounts they do and then try to blame other stakeholders for incremental increases when their own baseline cost is so high to begin with. Like the Dire Straits song says “when you point your finger ’cause your plan fell through, you’ve got three more fingers pointing back at you.”

That’s the thing about tax harmonization: everything that’s captured in the net goes up by an identical percentage amount, but those things that cost the most in the first place are the ones that go up the most in absolute dollar terms. That, in turn, brings into question the concept of value, which is different from cost. When it comes to actively-managed mutual funds, their value is questionable and unpredictable, while their cost is highly predictable — in fact, it is a near metaphysical certainty. Cost is merely the most conspicuous and readily quantifiable component of value.

Now for the irony. We’ve got one industry executive noting that the impact of HST on a fund with a 2.5% MER would be to add 20 bps in cost (making the total 2.7%) and another saying that 2.7% is the high-water mark where clients should be prepared to ‘just stroke it off your list’ of considered products on the grounds that the fees being charged are too high. The undeniable consequence for consumers is that, in pure dollar terms, the higher a product’s MER, the bigger the impact of the HST. There are quite a few funds in Canada today with (pre-HST) MERs in excess of 2.5%, so it is no surprise that Canadian mutual funds are advocating against the HST.

I wonder though, what the reaction of the Canadian mutual fund industry will be to the implementation of the HST once it has been implemented, converting hundreds of already-expensive Canadian mutual funds into even more expensive products. I wonder how forcefully the fund industry’s executives will encourage their valued unit holders to ‘stroke off’ their own products from the list of alternatives. Perhaps mutual fund companies will lower their MERs by 20 bps or so to offset the impact of the HST for their valued customers? I also wonder what a mutual fund executive from a lower average MER country might make out of all this.

By way of comparison, I wonder if everyone reading this knows that the MER on Canada’s largest equity ETF (XIU from Barclay’s) is currently 0.17%. Even with HST tacked on, the MER would still only be 19 bps. Stated somewhat differently, the total cost of some products with HST included will now be lower than the simple increase in cost of many of the products currently on the market.

The cost of HST will be an uneven new cost to investors depending on what kind of products they invest in. The most expensively priced products on the market are about to become even more expensively priced, yet the people charging the higher fees expect the public to accept that these costs are justified by the unpredictable variable return. The simple point is that the more cost goes up; the more value goes down.

John J. De Goey, CFP is vice-president with Burgeonvest Securities Limited (BSL). The views expressed are not necessarily shared by BSL.


John De Goey