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A survey released today by Justwealth Financial Inc. finds a knowledge gap about how much Canadian investors are being charged on their investments: almost two thirds of those surveyed didn’t know exactly how much they paid in annual investment fees.
The survey of Canadians across Canada aged 25 or more was conducted via Google Consumer Surveys, and also uncovered a lack of awareness around upcoming regulatory changes to investment reporting requirements.
The changes surrounding the Client Relationship Model – Phase 2 or CRM2 — will take effect this Friday (July 15, 2016). They are the third annual list of amendments to promote increased disclosure regarding fees and investment performance. According to the Justwealth survey, 65.1 per cent are not aware of the upcoming changes. {See also Graham Bodel’s recent Hub blog on these changes: Big changes for mutual fund investors and Anthony Boright’s Hub blog entitled Get ready for POS3 and CRM2 deadlines.)
Conflicts keep investors in the dark
In a press release Justwealth president Andrew Kirkland said this:
“For a long time Canadian investors have been kept in the dark about how fees are charged for investment services and the many associated conflicts of interest that can exist. This veil of secrecy has contributed to an erosion of trust in traditional investment models.”
Kirkland applauds the upcoming changes, saying CRM2 will “go a long way in repairing this trust.”
The general lack of awareness about investment costs stands in contrast to concerns survey participants had about the cost-effectiveness of financial services like investment management. When asked about the key motivating factors for considering using an online investment service, the number one factor by a wide margin was cost, at 51.3 per cent.
“As investors come to understand exactly what they’re paying in fees, investment firms will be under the microscope to explain the value they provide their clients,” said, Justwealth Chief Investment Officer James Gauthier, “There’s been some scrambling and damage control within the industry in reaction to CRM2. By contrast, online investing platforms and robo-advisors are inherently built to deliver maximum value on minimal fees, while not compromising on product offerings or service levels.”
Gauthier says the impact of fees “can be devastating for an individual’s wealth over time. High mutual fund fees or excessive investment advisory fees can eat up more than half of an investor’s savings over their investing lifetime.” A typical robo-adviser service charges one third to one half of what the traditional option of retail mutual funds do, Gauthier added.
Four in five not aware of robo-adviser alternative
Even so, and despite growing investor awareness of the impact of high fees, more than 80 per cent of survey respondents were not familiar with the advantages of robo-advisors. While they’ve been in the Canadian market for more than two years, awareness of them is “still quite low,” Kirkland says. He expects that as CRM2 comes into effect, investors will start to look for more cost-effective solutions.
Justwealth is of course itself a robo-adviser although it prefers to describe itself as an “online investing platform” — one offering more than 60 portfolios. But its self-interest doesn’t change the basic dynamic at work here. Costs do matter and the underlying investments of most robo services are ETFs that are much less costly than mainstream retail mutual funds. Even after adding in typical robo charges of 0.5% a year to select and monitor the underlying ETFs, they should provide equivalent diversification and asset allocation as the older products, and should generally return more to investors because of the fee differential.
Of course, there’s nothing to stop do-it-yourself investors from saving an extra 50 beeps and picking their own ETFs at a discount brokerage. Although, as I pointed out late last week at The Motley Fool, the proliferation of ETFs has made it a lot trickier. See The ETF landscape in Canada is getting a lot harder to traverse.
It remains to be seen whether investors really do start to become more aware of the fee discrepancies that CRM2 will illuminate. Widespread media criticism of Canada’s record-beating MERs has existed for the better part of 20 years so it’s not like it’s been a well-kept secret.
