The cost of owning the average mutual fund

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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IdOp
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Post by IdOp »

Maybe what's required, in all fund promotional material and prospectuses, is to replace the term "Management Fee" by "Ignorance Levy". This might entice the average investor divert their attention to it.
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Post by Shakespeare »

our regulators haven't yet found some pretext under which they can move to "protect" Canadians
ISTM there was a campaign 5 or 6 years ago.... :wink:
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Post by Bylo Selhi »

Shakespeare wrote:
our regulators haven't yet found some pretext under which they can move to "protect" Canadians
ISTM there was a campaign 5 or 6 years ago.... :wink:
There was but it was mounted by Finance, not the provincial regulators. They were trying to ensure that income taxes were being paid by investors and managed to inadvertently snag a bunch of innocent investors in their overly broad net. Once assured that those investors already declare the income and pay the taxes they exempted US-listed stocks and mutual funds. So in fact, the federal government doesn't object if Canadians buy US mutual funds and ETFs. It's only the provincial regulators who do (at least wrt to US MFs.)
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Post by AltaRed »

Bylo Selhi wrote: It's only the provincial regulators who do (at least wrt to US MFs.)
And their influential lunch buddies in the financial industry. Not sure it would be any better if we had a national securities commission, but I am guessing it would have the resources, if not will, to have more backbone.
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Post by The Wealthy Boomer »

I'm not sure it's fair to equate high fees just with active management. I've written that index funds sold through advisors can also have high fees -- exhibit A being the 1% trailers on DFA Canada index funds if they're not selling them through a fee-based model. I like DFA funds for a portion of a portfolio but think 1% across a total portfolio is a bit much for passive management. 60 or 75 bps would be more in line with the supposed "costs matter" approach, I'd suggest. If the old Trimark Fund still has a 30 bps trailer on an actively managed fund, surely 1% on a passive fund should be regarded as excessive?

And don't be so sure ETFs won't go down the same path. In Swensen's book, Unconventional Successs, he generally sings the praises of ETFs vis a vis mutual funds, but also warns that as they get more popular, ETF manufacturers will be tempted by the same gimmicks as their mutual fund confreres. He's seeing more and more questionable ETFs: typically higher-price sector funds which deliver dubious value to consumers, in Swensen's opinion.
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Post by NormR »

[Ed. removed]
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Post by DanH »

Bylo Selhi wrote:
DanH wrote:Let's steer clear of allegations, shall we? I heard nothing of Advocis' involvement in that.
Added: Actually Dan, you've already connected the dots :twisted:
Sure, I left it open as a possibility that "advisors" had some influence but I never mentioned any specific party. You're the one who mentioned Advocis, who I'm not aware had any involvement with the whole Etrade thing.
Bylo Selhi wrote:
The fund companies are free to pursue their chosen distribution paths.
WADR that's a load of bovine scat. Look what happened when AIM Trimark tried to do just that.
WADR, you don't know what AIM Trimark did or didn't do. No fund company ever issued a press release confirming the Etrade deal. Was it suspicious? Yes. Do we KNOW what AIM Trimark did or what ACTUALLY transpired behind the scenes? No.

I think it's best to stick to facts in this context. Otherwise, you could find yourself stepping in scat ;)
Bylo Selhi wrote:
Cow poop! Anybody can buy a Vanguard total market ETF for 7 basis points through a broker for cying out loud.
And how exactly did the Canadian fund companies contribute to make that happen?
Whoa! Now the fund industry is expected to foster competition that would reduce its margins? It's worth repeating: Cow poop!
Bylo Selhi wrote:Canadians were lucky beneficiaries of Vanguard's and BGI US" decision to offer ETFs to US investors. (Thankfully our regulators haven't yet found some pretext under which they can move to "protect" Canadians from those bad US fundcos who are operating illegally on their turf.)
I see...criticize regulators when you don't get what you want but don't give them credit for being able to access the cheapest index fund on the planet. Interesting.

Since this thread had taken a little tangent, I thought I'd repeat this...
DanH wrote:Are Canadian fees excessive?
A preliminary research paper, titled Mutual Fund Fees Around the World co-authored by U.S. and British academics, is causing quite a ruckus. The draft paper concludes, among other things, that Canadian mutual funds are by far the most expensive in the developed world. Journalists are salivating over the paper, which has caused much trepidation in the Canadian fund industry. No doubt, Canadian fees are high. But, as usual, the devil is in the details.

...

I'm puzzled by the amount of the annualized load calculated by the researchers. The draft paper shows annualized loads as 198 basis points annually for Canadian funds. I inferred this figure from the difference between the 2.68% average total expense ratio and the 4.66% average total shareholder cost figures. Assuming a five-year holding period, that's equal to a total sales charge of about 10%. That exceeds any front end or deferred sales charge. I figure a 10% sales charge is only possible if both front and deferred loads are added together for each fund and assuming a fairly punitive DSC schedule. In practice, only one of front or deferred load applies to any single fund transaction - not both.
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Post by beaverlodge »

Costs matter.
So does service.
In this country advisors are a long way, for all kinds of reasons, from any kind of fee for service.
So can we assume that until that happens the status quo continues, the good and the bad, the good and the bad advisors, with good and bad advice. Lots of good and lots of bad.

A very small part of the investing public have the knowledge, interest or time to advance their financial affairs. That is probabley close to 5%

The other very large majority are not very good with calculators, don't read financial columnists, feel confused about things financial and are busy getting on with their lives.

Those who do read the columnists come to recognize their prejudices and hobby horses.

During good investment times investos seldom complain.
During bad investment times investors can complain.

If they make money fees hardly matter. They look at the bottom right hand side of their statements. If they don't make money they might well blame the advisor, as if the advisor made the market.

There are two and perhaps more sides to this and every other story.
Lay down your swords.
And respect both sides.
There will not be much crossover.
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Post by Bylo Selhi »

DanH wrote:WADR, you don't know what AIM Trimark did or didn't do. No fund company ever issued a press release confirming the Etrade deal. Was it suspicious? Yes. Do we KNOW what AIM Trimark did or what ACTUALLY transpired behind the scenes? No.
Well evidently somebody wasn't telling the whole truth...
RobC wrote:What exactly happened here is unclear, to say the least. AIM says it never signed off on the news release E*Trade sent out March 30, although it had been talking to the company about F-class funds. "We didn't have an agreement with E*Trade, and it doesn't look like we're going to," said Dwayne Dreger, vice-president of communications.

Hill & Knowlton, E*Trade's public relations company, said it had full approval for the release from AIM, and that the company was fully on board. "We don't issue releases unless the people who are referenced have approved it," said a Hill & Knowlton representative. "All of it was good to go last week, and obviously something's happened."
DanH wrote:Whoa! Now the fund industry is expected to foster competition that would reduce its margins? It's worth repeating: Cow poop!
My point is simply that Vanguard's entry was unplanned and unanticipated. It wasn't, as is for instance SteadyHand's expected entry, a deliberate attempt to offer Canadians some low cost options. You can't use Vanguard to argue that Canadians benefit from unfettered competition within the Canadian fund industry.
I see...criticize regulators when you don't get what you want but don't give them credit for being able to access the cheapest index fund on the planet. Interesting.
They don't deserve any credit for Vanguard. They had nothing to do with it. Vanguard hasn't filed anything here AFAIK. The regulators haven't been able to stop them only because then they'd have to stop the sale of all US-listed stocks, something that even they aren't arrogant (or stupid) enough to try.

So, in the end, it's OK for Canadians to buy VTI even though they're prevented by our regulators from buying VTSMX (a different share class of the same fund.)
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Post by ghariton »

AltaRed wrote: Not sure it would be any better if we had a national securities commission
I really doubt it. A national regulator would almost certainly be run out of Toronto by the same crowd that gathers sround the OSC. And if you think that present Ontario regulation has investors' interests at heart, just look at the kid glove treatment of mining and prospecting activities. (Did I mention the mining and prospecting industry lobbyists?)

Thank goodness for my right to buy ETFs. I guess that one snuck by the Bay Street boys. Perhaps they underestimated the threat. But as long as I have access to ETFs, I don't much care what the mutual fund gang does. Let customers have the choice of getting ripped off. I only become upset when customers' ability to choose low-cost alternatives is blocked by government restrictions and industry spread of FUD.

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Post by ghariton »

A couple of questions.

Looking at the I Shares EAFE fund, the Canadian version XIT has a MER of 0.50%, while the U.S. version EFA has a MER of 0.36%.

(1) Are the two funds the same? (Except for the currency they are denominated in?)

(2) If they are the same, does that mean that 0.14% covers the extra regulatory costs of multiple jurisdictions in Canada, higher unit costs for advertising and marketing because the Canadian market is smaller, etc? Is 0.14% a reasonable first order approximation of the extra costs of operating in Canada?

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Shakespeare
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Post by Shakespeare »

(1) Are the two funds the same? (Except for the currency they are denominated in?)
XIN hedges EFA to C$.
(2) If they are the same, does that mean that 0.14% covers the extra regulatory costs of multiple jurisdictions in Canada, higher unit costs for advertising and marketing because the Canadian market is smaller, etc? Is 0.14% a reasonable first order approximation of the extra costs of operating in Canada?
The 0.14% covers the hedging, as well as any additional costs.
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Post by beaverlodge »

Comparisons of Canada to other countries and exchanges are illusory and fraught with too many differences that will never come close to any equal playing field, even if that idea is a good one.

Best to accept that Canada is a society different from any of the others and our social fabric consists of a large majortiy of investors who are conservative minded.

That will not change.

Instead of beating this horse to death, with no chance of any outcome that enthusiasts in this forum would prefer, go on to other more productive topics.

Start one where it really counts. Like real estate agents raking in very large incomes for doing the same amount of work. A home for $500,000 now sells for $1,000,000 and the commission rates remain the same in most if not all provinces. The work load is the same or perhaps less.

How about a campaign to save the seller and buyer thousands of dollars.
Talk about a high MER!

Go for it boys and girls
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Post by gyrfalcon »

DanH wrote:A show of hands...

Have you ever been charged front or back end load of 9%, 10%, or 13% on your mutual funds (not including the MER)?

Anybody?

Oh right, let's not let measely details get in the way of a good cause. Carry on...
The last time I paid either a FE or a BE Load was in 1986. It was exactly 6% at McLeod Young Weir.

I joined TD GreenLine in '93. I have transaction slips for late '94 that show 0% FE & no sales charge. This was NOT a TD Fund. [I don't think it was unusual for a small investor to be with GreenLine at that point.]

Since that time [TDW since '99], I've paid a Sales charge of $45, and later $33.75, to redeem a *few* non-TD Funds. This usually works out to well under 0.5%, but is directly related to the amount, of course. The good majority of TDW sales are / were commission free.

It should be needless to say, a huge list of Fund Cos have 0 charge at purchase, at TDW. I believe PH&N is the exception. gyr.
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Post by DIYCitizen »

Mutual Fund sales to Canadians is controlled by a number of enterprises that hold a captive market. PH&N is the only true choice if one wants no trailers, commisions, etc. There are big interests involved that will not allow for a change in the purchasing model, i.e. the purchase of F class funds. This, of course, everyone knows. Right?

As was mentioned earlier in this thread, one can vote with your wallet. For those who are enlightened will reap the benefits of the lower cost alternatives. For all other suckers that are born each minute, too bad. There is not much help out there for them - not from protection groups, not government agencies. I realized this a loong time ago and have acted accordingly.

Cheers.
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Post by tidal »

Shakespeare wrote:
(1) Are the two funds the same? (Except for the currency they are denominated in?)
XIN hedges EFA to C$.
(2) If they are the same, does that mean that 0.14% covers the extra regulatory costs of multiple jurisdictions in Canada, higher unit costs for advertising and marketing because the Canadian market is smaller, etc? Is 0.14% a reasonable first order approximation of the extra costs of operating in Canada?
The 0.14% covers the hedging, as well as any additional costs.
Granted, the XIN is currency hedged, but the 0.14% only covers the mechanics of actually implementing and keeping the hedge in place. The hedging itself incurs its own additional costs, which will be borne by the XIN unitholders. Typically the "cost" of the hedge is effectively the difference in the interest rates between the two currencies... With Cdn rates currently lower than US rates now, it is an additional cost to XIN unitholders... although when Cdn interest rates exceed US, the hedge can actually provide a small positive return to the fund (i.e. the hedge "pays for itself"...)

In any event, the XSP - which is also currency hedged - is straightforward: you are buying US assets and hedging out USD currency risk. With XIN, you are buying EAFE assets and hedging out USD currency risk... if you work through what that really implies, it is a curious little beast...
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Post by AltaRed »

tidal wrote: With XIN, you are buying EAFE assets and hedging out USD currency risk... if you work through what that really implies, it is a curious little beast...
Haven't looked at the details, but why would the hedge not primarily be with the Euro, Sterling and the Yen, rather than US$?
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Post by tidal »

AltaRed wrote:
tidal wrote: With XIN, you are buying EAFE assets and hedging out USD currency risk... if you work through what that really implies, it is a curious little beast...
Haven't looked at the details, but why would the hedge not primarily be with the Euro, Sterling and the Yen, rather than US$?
ixnay that... they do some of the hedging in other than $US... that is from page 47 here http://www.ishares.ca/publish/content/r ... 006_EN.pdf ... still quite a bit of USD hedging, but also Euro, GBP, JPY, HKD, etc.
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Post by beaverlodge »

Mutual Fund sales to Canadians is controlled by a number of enterprises that hold a captive market. PH&N is the only true choice if one wants no trailers, commisions, etc. There are big interests involved that will not allow for a change in the purchasing model, i.e. the purchase of F class funds. This, of course, everyone knows. Right?
And then the financial advisor has the option and adds their percentage to it.
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Post by The Wealthy Boomer »

[ModeratorA shifted this post and the next from another thread.]

I meant to post the following on the "high costs of funds" thread with the global MER study but couldn't find it. Anyway, the Montreal Gazette has just weighed in with a reference to the study and a plug for the sites of both Bylo and Shakes. Here's the top of it: perhaps someone can provide the full link.

Mutual funds: how they're ripping us off

DON MacDONALD, The Gazette

Published: Monday, September 25, 2006
A couple of years ago, I swore off on warning people about Canada's high-priced mutual funds.

I'm far from the only one complaining about the extravagant management fees charged on mutual funds in this country, but all the grousing never seems to have any effect. Small investors continue to shovel their life savings into mutual funds - more than $600 billion in total so far - and the banks and fund companies continue to rack up monster profits quarter after quarter.
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Post by Shakespeare »

Mutual funds: how they're ripping us off

[Hint to TWB: do a Google news search on the title to get the column.]
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Post by The Wealthy Boomer »

Thanks, Shakes. What I found interesting about the piece was the writer's confession that he had "sworn off" writing about high fees. Why would he do that? I'm certainly acquinted with the feeling that you feel you're banging your head against the wall -- indeed the average media article on such topics is about as effective as a fan in a hurricane -- where the hurricane is the collective might of the financial industry, both manufacturers and dsitributors. Still, it behooves the "fans" to keep doing their bit to circulate the air. The cumulative effect, coupled with forums like this and word of mouth, surely should ultimately serve to improve things over the long run.

I have the impression the writer will be reading this thread so hope to hear directly from him here about why he felt that way.
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Post by DanH »

I'm certainly acquainted with the feeling that you feel you're banging your head against the wall...
I know what you mean.

That notwithstanding, the notion of introducing cross-border competition to mutual funds is not a new idea.
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Post by yielder »

The Wealthy Boomer wrote:Still, it behooves the "fans" to keep doing their bit to circulate the air.
Looks like he's trying to circulate fresh air: "[w]ith the Quebec legislature set to open hearings on the mutual-fund industry in the wake of the Norbourg scandal", "[o]ne group of investment industry professionals and academics believes part of the answer to bringing down Canadian mutual fund fees is opening the border to allow Canadians to buy funds from foreign companies."

"The high fee issue has been talked to death, now it's time to see if some competition will help solve the problem."
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Post by The Wealthy Boomer »

Yabut.....Canadians can already buy Vanguard ETFs, and Powershares and anyone else's worldwide. Doesn't really matter if we can't buy Vanguard index funds is we can buy Vanguard ETFs?

Plus, ITSM there's lots of competition in Canada: 175 IFIC members, all the banks, hedge funds, linked notes, directly sold no loads, wrap accounts, segregated management and pooled funds. I'm sure anyone out there feels the competition is quite intense enough -- it's just that when someone does try to compete on price, they get killed: Scudder and Opus 2 Direct, to name some recent examples.
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