How to Combat the High Price of Mutual Funds in Canada

Some of our more “seasoned” readers will remember this tagline from an award-winning advertising campaign for Wendy’s in 1984. The campaign took aim at Wendy’s fast food competitors, suggesting that their products were not all they were purported to be. “Where’s the beef?” quickly became the symbolic question for anything lacking substance or not delivering value.

According to investment industry consultant, Investor Economics , there are approximately 14,300 advisors in Canada pursuing clients in the High Net Worth segment, which is defined as those households having $500,000 or more in investible assets. The great majority of these advisors are full-service investment advisors (“stock brokers”), private bankers or advisors based in one of the 6,205 bank branches coast to coast. In most cases, these advisors work for, or are tied to large financial institutions, which compensate them for selling their products and services. Most often, this compensation (along with multi-million dollar marketing and advertising budgets) is paid, in turn, by the investors themselves, via fees and commissions.

Failing grade for mutual funds in Canada for associated fees and expenses

Fees and expenses on the most popular investment vehicle in Canada, mutual funds, are amongst the highest in the world. While mutual funds offer small investors a broad range of mandates and diversification that might not otherwise be available to them, holders of these securities pay a high price whether they have invested $500 or half-a-million dollars. According to a 2013 study conducted by Morningstar, the average management expense ratio on a balanced mutual fund in Canada is 2.15%. Most of the other 24 countries in the study fell between 1.25% and 1.75%, with the United States averaging 0.77%. For that, Canada was given a grade of “F” in the Fees and Expenses category.

Our friends at independent mutual fund company, Steadyhand, have developed what they call The Fee Tree. It depicts what an investor should expect to pay in investment fees depending on the size of their portfolio and the sort of service they receive from their advisors. You will see from the schematic that investors with portfolios in excess of $1 million and receiving full-service advice should realistically expect to pay investment fees of 1.0% to 1.5% for a balanced portfolio. Do-it-yourselfers might pay between 0.75% and 1.0%.

The portfolio management approach – more than just lower fees

At Nexus, a balanced combination of our Equity and Income pooled funds for a $1 million portfolio would generate investment management fees of approximately 1.04%. Because of our tapered fee schedule, the average fee would drop to 0.93% for a similarly constituted portfolio of $2 million and to 0.79% for a $5 million portfolio. The only other fees that are charged to our pooled funds are direct expenses which are incurred by the funds, such as legal, audit, custody, etc. Currently, these additional expenses range from 0.07% to 0.16%, depending on the fund. There are no fees charged for withdrawals, fund transactions, transfer-out fees, annual administration fees or deferred sales charges.

While they are an important consideration, fees are not the only thing to think about when choosing an advisor. So, where’s the beef?

Unlike the majority of advisors who are affiliated with large financial institutions, independent portfolio management firms, such as Nexus, generally offer a much better value proposition. Along with more reasonable fees, well-heeled investors and their families can expect personalized, professional investment management, a fiduciary duty to put the client’s interests first, thorough performance reporting and, in some cases, a financial plan to ensure that their investments are up-to-date and consistent with their objectives.

Portfolio management firms, as well as the individuals managing investments and advising clients, are all registered with, and strictly monitored by, provincial securities commissions. Education and experience requirements are very stringent and more exacting than those required by many other financial advisor categories. Most professionals who manage clients’ portfolios have met the requirements for the Chartered Financial Analyst (CFA) designation, a rigorous three-year program which in 2013 had a combined 43% worldwide pass rate . All four members of the Nexus investment team have the CFA designation and the three portfolio managers have worked together as a team since 2000. Clients’ investments are further protected by strict requirements concerning capital, financial reporting and insurance, and clients’ cash and securities are held at a third party custodian for safekeeping.

It would be natural when evaluating one’s financial advisor to simply compare investment performance and fees. At Nexus, we feel that there is significant additional value in integrating investment management with financial counselling to ensure that a client’s investments are consistent with their investment horizon, objectives and risk tolerance. Our financial counselling services look at the “big picture”, focussing on tax efficiency, estate planning and investment structuring to develop a customized roadmap for achieving a client’s financial goals and their peace of mind. We review the plan on a regular basis and are always available to discuss the implications of a change in lifestyle or one-time events, such as real estate transactions, gifts to children, or philanthropic giving. For Nexus clients with over $1 million to invest, these services are available at no additional cost.

For investors with $500,000 or more, we feel that dealing with a portfolio management firm is a much better choice than the more commonplace and aggressively marketed alternatives. It brings to mind another popular tagline made famous by Avis Rent a Car during the 1960s…“We’re #2. We Try Harder”.