U.S. and Canadian Mutual Funds Costs to Advisor-Assisted Investors are Comparable - New Studies Show

TORONTO, March 6, 2013 /CNW/ - For several years, Canada's mutual fund industry has been the subject of cross-border (Canada/U.S) analyses of investor costs. At times, these analyses have not taken into account key differences between the two marketplaces, and the way such costs are charged to investors.  New research published by Investor Economics (Canada) and Strategic Insight (U.S.) provides a comprehensive fact-based cost comparison from which several key findings emerged.

The research report, Monitoring Trends in Mutual Fund Cost of Ownership and Expense Ratios, A Canada - U.S. Perspective demonstrates that:

• 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.

"The report's analysis of the relative costs of advisor-assisted mutual fund ownership in Canada and the U.S. supports the industry's assertion that the fees paid by Canadian mutual fund investors are in line with those paid by advisor-assisted U.S. investors," said IFIC president and CEO Joanne De Laurentiis. "Advice delivers enduring value for investors by creating a culture of savings and higher levels of wealth accumulation. As this new research thoroughly demonstrates, Canadian mutual fund investors' costs to access that advice, along with the many other benefits (such as professional management) that the mutual fund product delivers,  are not dissimilar to the total costs to U.S. fund investors' who are helped by an advisor."

The research report is based on two detailed studies analyzing the cost of ownership in Canada and the United States. Both studies undertook comprehensive analyses of all of the costs associated with owning mutual funds - including reported fund expense ratios (known as MERs in Canada and TERs in the U.S.), as well as costs residing outside of the fund expense ratios.  Strategic Insight found that, in recent years, over 80% of U.S. retail fund investors helped by a financial advisor outside their defined contribution retirement account have migrated to a fee-for-advice model, the costs of which are in addition to the funds expense ratio, and thus often not considered in MER/TER comparisons.

"Differences in how payment for financial advice has evolved in the two marketplaces have been major contributors to misperceptions about the gap between the costs borne by Canadian and U.S. mutual fund investors," said Investor Economics senior managing director Goshka Folda. "When we exclude HST taxes, which are unique to Canada, and compare the total costs to the ordinary investor helped by a financial advisor, they turn out to be remarkably close to the costs in the U.S.—closer than what might have been expected, given that the U.S. mutual fund market is roughly 15 times bigger than Canada's and thus able to deliver greater economies of scale in many areas."

Strategic Insight research suggests that in the U.S., the shift to an asset allocation-based portfolio of funds, wrapped with a fee-for-advice, undoubtedly creates more balanced and prudent investment strategies over time. As part of its report, Strategic Insight analysed typical fee-for-advice charges according to sizes of accounts.  Three observations stand out.  The first is that the fee-for-advice approach tends to be biased against small investors, with some programs requiring a large minimum.  The second is that U.S. investors are paying a substantial amount under the fee-for-advice model - by some estimates roughly 60% of investors with account sizes of $100,000 pay between 1.0 and 1.5% for advice in addition to the published TER, and nearly one-third of such investors are paying over 1.5%.  And the third is that under a fee-for-advice model, investors have no easy way of comparing the fees they pay with what others investors may be paying other wealth managers for similar services.

"The relationships between investors and their financial advisors include myriad considerations, are built on trust, and are inherently asymmetric. The U.S. mutual fund marketplace has been a laboratory of how such relationships influence fund shareholders' total costs and price equilibrium. Over the past two decades, the shift towards asset allocation-based portfolios of funds, wrapped with a fee-for-advice, has helped many investors act more prudently and maintain a more balanced portfolio. At times, though, such transition has come with higher total ownership costs over the lifetime of the investment, with loss of transparency and comparability, and with reduced access to advice by the smallest investors," commented Strategic Insight's executive vice president and director of research Avi Nachmany.

"Loss of access should be of particular concern to regulators," said Ms. De Laurentiis. "According to Ipsos Reid and Pollara, over half of Canadian investors start investing with less than $25,000, and one-third start with less than $10,000.  Under the prevalent Canadian embedded fee model, the $10,000 first-time investor gets access to a professionally managed fund and the benefits of advice for around $210 - or the price of an IPod—whereas, under a fee-for-advice model, that investor would likely be negotiating a fee on his or her own.  Given what we now know about the benefits of advice, maintaining early affordable access to advice should be a priority for regulators."

The research report, and the underlying extensive analytical studies on which it was based, can be found at the links below, or at www.ific.ca under IFIC Reports.

Monitoring Trends in Mutual Fund Cost of Ownership and Expense Ratios, A Canada - U.S. Perspective

Mutual Fund MERs and Cost to Customer in Canada: Measurement, Trends and Changing Perspectives, by Investor Economics

A Perspective on the Evolution in Structure, Investor Demand, Distribution, Pricing, and Shareholders' Total Costs in the U.S. Mutual Fund Industry, by Strategic Insight

The Investment Funds Institute of Canada is the voice of Canada's investment funds industry. IFIC brings together 150 organizations, including fund managers and distributors and industry service organizations, to foster a strong, stable investment sector where investors can realize their financial goals. By connecting Canada's savers to Canada's economy, our industry contributes significantly to Canadian economic growth and job creation. The organization is proud to have served Canadian financial consumers for more than 50 years.

SOURCE: Investment Funds Institute of Canada

Jan Dymond, Director, Public Affairs, IFIC: [email protected], 416-309-2306 or
Sara Clodman, Senior Manager, Public Affairs, IFIC : [email protected], 416-309-2317

Goshka Folda, Senior Managing Director, Investor Economics: [email protected] , 416-341-0114, ext. 213

Avi Nachmany, EVP and Director of Research, Strategic Insight:  [email protected], or [phone]