Investors paying closer attention to fund fees,

(January 28, 2003) As markets continue to underperform, investors are paying more attention to mutual fund fees, according to Maclean’s annual ranking of Canadian mutual funds. Some of those fees are on the rise, the survey indicates.

According to Morningstar Canada, who conducted the survey for Maclean’s, management expense ratios (MERs) have been increasing for the last four years. In the Canadian equity category, the median MER grew to 2.76% in 2002 from 2.5% in 1999. At the same time, the median annual return for equity funds fell dramatically — from 20.6% in 1999 to -13.6% in 2002 — the survey found.

“According to some experts, as markets go down, concern about fees goes up,” says Maclean’s business correspondent Katherine Macklem. “It’s time to invest defensively and it’s time for investors to pay closer attention to how their portfolios are being managed.”

“Investors are starting to realize that there is a lot of randomness their advisors can’t control, and that fees are not a guarantee against losing money,” York University finance professor Moshe Milevsky tells Maclean’s.

Milevsky says Canadian MERs are high compared to their U.S. counterparts, which average 1.5%. “There’s room for a very low-cost fund manager in Canada like the U.S.’s Vanguard Group, which offers basic garden-variety funds that track the market,” he adds.

The fee issue was also the subject of a recent Canadian Securities Administrators news release, aimed at investors. The CSA recommends that investors ensure they understand how their advisors are paid, noting the various type of fees associated with mutual funds, such as MERs, transfer fees, front-end loads, deferred sales charges and trailer fees.

Keeping clients up to speed on fees simply makes good business sense, says Ontario Securities Commission spokesperson Eric Pelletier. “Advisors are aware that a well-informed investor is a good client to have,” he says. “So it’s in their interest to keep clients aware of fees.”

Pelletier notes the OSC’s Web site has a mutual fund fee calculator to allow investors to check the impact of fees on return on investment. “This may be a competitive advantage for advisors who have reasonable fee structures to help keep clients,” he says.

Toronto advisor John De Goey bypasses the issue of fund fees entirely, by basing his practice on a fee-for-service, or “fee-based” model. De Goey calls mutual fund fees “complex and fraught with conflict and biases.

“I get paid directly by my clients so there’s no doubt as to whether I’m recommending a product because it pays me more,” the Assante senior advisor told Advisor.ca. “There are cases where advisors make recommendations when compensation is the primary concern and what’s right for the client is a secondary concern.”

De Goey admits only a few advisors are using the fee-for-service approach and that clients aren’t demanding it. But he says clients do like the concept, once it’s explained to them. “The reason most clients don’t clamour for it is most advisors don’t take the initiative to tell them because they’re scared of asking to get paid directly.”

The Maclean’s survey also touches on the issue of investor confidence, shattered by last year’s accounting scandals. Anecdotal evidence suggests confidence may be on the rebound, Maclean’s says, “helped in part by the sight of executives in handcuffs on television.”

Those scandals have had an impact, prompting a couple of investors interviewed by Maclean’s to consider socially responsible mutual funds.

“I can’t stomach the idea of my money being anywhere near the billion-dollar-a-day military industry of the U.S.A.,” Jennifer Jones of Sackville, New Brunswick, told the weekly newsmagazine. “People don’t often make the link between politics and where their money goes.”

The Maclean’s 7th annual mutual fund report was released yesterday. It also includes charts of the “Hot 100” funds in 2002 and the year’s winners and losers. For more information, check the Maclean’s Web site.

Maclean’s and Advisor.ca are properties of Rogers Media.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(01/28/03)

Doug Watt