Fund fees lower than they appear

A Morningstar report released on Tuesday suggested that Canadian mutual fund investors were content being nickel-and-dimed by fees, and gave the industry a failing grade on expenses.

The report concluded that Canadian mutual fund investors were paying exorbitant fees, largely because they were being driven by their advisors into funds that pay better trailing commissions.

But the costs associated with mutual funds have been under scrutiny for years. Investors obsessed with constructing a portfolio based on the lowest possible cost have probably already abandoned both mutual funds and the advisor distribution model.

A recent study by PricewaterhouseCoopers found that most Canadians who use advisors are pleased with the service they receive, suggesting that the costs associated with financial advice are considered acceptable.

“Otherwise, we would see them leave in droves,” says Joanne di Laurentiis, president of IFIC. “I think the fact that they are staying the course, and staying in [their funds], I think they like all the aspects of mutual funds.”

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The ease of entry into funds and the instant diversification the funds offer are two of the most commonly cited advantages of mutual funds.

“What this Morningstar report has been hampered by is the same thing as other reports of this kind that try to get at the fees. They have a real difficulty because there are some very significant differences in the business models across jurisdictions,” says di Laurentiis.

“I wasn’t surprised that the authors of the report said they weren’t able to get at the kind of comparable data that I think would show that Canada is not an outlier when it comes to fees at all.”

She says the key to the misunderstanding is the disclosure level in Canada, which the report praised. Canada’s fund prospectuses were given top marks in the study, but the authors may have taken the content of these reports too literally, for example, assuming that posted fees are actually being charged.

“The vast majority of people who buy front-end load funds are paying zero,” says di Laurentiis. “When I say vast majority, I’m talking about 90%. When you look at the posted rate and say ‘this is what Canadians pay,’ it’s not providing the right picture.”

Because the industry is so competitive, most advisors are trying to minimize costs to clients, not raise them.

“Most of our senior advisors are doing front-end at zero,” says Joe Canavan, chairman and CEO of Assante Wealth Management.

“I think the bare fees for portfolio management are reasonably competitive,” says Canavan, although he points out that larger management firms can take advantage of their economies of scale to keep costs low.

He says his firm’s advisors have not received many client complaints following the release of the report, and chalks that up to the value of the services the clients receive.

“People are happy to pay the fees as long as they are aware of them, and they are fair and justifiable,” Canavan says. “It’s important that we show what our value proposition is.”

A complete wealth plan involves a number of professionals, including tax accountants and lawyers, estate specialists and investment advisors.

“All of these services are available to all of our advisors who want to provide holistic wealth management solutions,” he says. “There is a lot inside of our organization that we can bring to any client relationship. Fees aren’t the first thing people talk about. I think fees are a real factor when you’ve got some of these one-man-shop mutual fund dealers out selling products on a DSC basis.”

While there are some fund companies paying what he calls “egregious” trailers of up to 150 basis points, he says a reasonable ceiling for a trailer is no more than 100. An advisor would be ill-served jeopardizing a client relationship for marginally higher compensation.

Clients with relatively low asset bases will not add much to an advisor’s bottom line, while high-net worth clients are too valuable to the advisor, and are likely to cross the street if they feel they are being nickel-and-dimed.

“That is what I would call very short-term thinking and you’re not long for this business if your primary focus is on how much you’re going to make on each trade,” he says. “That’s just foolish.”

(05/15/09)