The fee-for-advice pay structure common in the United States offers less transparency to investors than the Canadian embedded-fee model for mutual funds, according to research carried out by Investor Economics and Strategic Insight for the Investment Funds Institute of Canada (IFIC).
The report suggests:
- The landscapes in both Canada and the U.S. have shifted from having fund investors pay for their financial advisor’s services at the time of purchase, to paying over the duration of the investment. However, in Canada, advisor fees are embedded within funds’ expense ratios, while in the U.S., compensation to financial advisors has moved to a fee-for-advice model with fees charged to fund investors separately and in addition to disclosed fund expenses;
- Neither U.S. nor Canadian regulators require fees-for-service to be disclosed explicitly, with the result that fees for advice charged outside the fund’s expense ratio are seldom captured in analyses of investors’ total costs;
- The U.S. fee-for-advice model offers less transparency of fund investors’ total costs than the Canadian model. Canadian fund fees, with embedded dealer/advisor fees, are disclosed and are easily compared across funds. In the U.S., it is up to each advisor-assisted investor to estimate his/her total cost of fund ownership, and no benchmarking of total costs is available across wealth managers;
- When all of the costs are factored in, the cost of ownership of funds in advised relationships in Canada is at a comparable level to the average cost of ownership incurred by a typical advised relationship in the U.S.
- On a tax-adjusted basis (no HST in the U.S.) the asset-weighted cost of ownership in Canadian advice channels is estimated to be 2.02% of invested assets compared to the level of approximately 2% in the U.S.; and
- There is no evidence that unbundling of fees in the U.S. (separate fees for investment management and advice) has resulted in lower costs to U.S. investors; rather, for many advisor-assisted U.S. investors, total costs over the life of the ownership of the investments may have increased.
Read the full report here.