Do you remember Keyser Söze’s line in The Usual Suspects? “The greatest trick the Devil ever pulled was convincing the world he didn’t exist.”
There is a parallel in investing: The greatest trick the mutual fund industry ever did was convincing people they should pay a percentage of their assets to invest.
Among other flaws, the percentage trick makes the amount Canadians are paying opaque. Most people just don’t know how much they’re being charged to invest and a lot of people I talk to think they’re paying nothing at all.
Canadians paying highest fees in the world
The truth is they’re paying the highest fees in the world.
In the United States, the fee on the average mutual fund has fallen below 1%. In Canada, the average fee on an equity mutual fund is 2.42% a year. It might sound small but it takes a huge bite out of the money Canadians would otherwise be saving. Paying 2.42% a year means you could be giving up 40-50% of your lifetime growth in wealth. That could be as much as hundreds of thousands of dollars in money you would otherwise have.
One of the reasons mutual funds in Canada charge such a high management fee is so they are able to fold in a fee for the financial advisor. Many funds’ fees include a 1% trailer fee (also known as trailer commission) that goes to financial advisors.
I believe that paying for financial advice in this country needs to change. As a matter of principle, I don’t believe you should keep having to pay more for the exact same services simply because you have managed to make smart choices and save more. At some point that equation breaks down and investors are paying way too much. In addition, I think we need to be much more transparent in the way individuals are charged for advice, products and all assets of wealth management.
The mutual fund industry was set up for a noble purpose. Building a portfolio out of stocks and bonds was expensive for the average person so funds were set up that included dozens or hundreds of stocks and bonds. People could buy a ready-made diversified portfolio.
Passive funds have much lower costs
But the industry has changed and with index funds and ETFs offering the same kind of diversification at a much lower cost mutual funds started competing by marketing themselves as products that could consistently beat the market. Objectively though, as long as fees remain so high it becomes almost impossible for funds to consistently beat the market over a longer time horizon.
So, as we wait for the industry to evolve and things to change for the better, start today in your search for low fees and proper diversification. Simply by holding this type of portfolio, you can be one of the smart investors that stops getting fooled by one of the greatest tricks the financial markets ever performed.
P.S. Are you reading this from Alberta or Manitoba? Well, I want to let you know that in addition to Ontario, we’re now registered to help clients in your beautiful province. Get more details.
Randy Cass is the founder of NestWealth.com, bringing more than 15 years experience in the financial services industry. Previously Randy managed quantitative portfolios at the Ontario Teachers’ Pension Plan and institutional assets at Orchard Asset Management. His previous company, First Coverage, won multiple awards as a top start-up including a financial services Morningstar award for best use of Technology in Canada before it was ultimately sold in 2011. Randy hosted Market Sense on BNN between 2012 and 2014.