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?