Norbert Schlenker wrote:I have two questions.
- Has anybody seen or produced an updated time series for Canada?
Norbert Schlenker wrote:- The difference between the US and Canada is almost exactly 1% per annum, which is (not coincidentally IMO) the approximate cost of commissions to advisors. Are Canadians in more need of investment advice than USians?
Norbert Schlenker wrote:- The difference between the US and Canada is almost exactly 1% per annum, which is (not coincidentally IMO) the approximate cost of commissions to advisors.
Expense Ratio. Most fund costs are bundled into the expense ratio, which is listed in a fund's prospectus and annual report as a percentage of assets. For example, if ABC Fund has assets of $200 million and charges $2 million in expenses, it will report an expense ratio of 1%. The expense ratio has several parts. The largest element is usually the management fee, which goes to the fund family overseeing the portfolio. There are also administrative fees, which pay for things such as mailing out all those prospectuses, annual reports, and account statements. The 12b-1 fee can be another large component of the expense ratio. Roughly half of all funds levy these fees. A 12b-1 fee covers a fund's distribution and advertising costs and can be as high as 1% of assets. Those fees that fund families pay to no-transaction-fee networks, which we learned about in Funds 105, often get charged to fund shareholders via 12b-1 fees.
[12b-1 fees] include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.
The SEC does not limit the size of 12b-1 fees that funds may pay. But under NASD rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year...
Norbert Schlenker wrote:In the US, the ICI is out with a report showing that (dollar weighted) full in costs of owning equity funds declined to 1.13% in 2005, with bond funds averaging 0.90%. The decline is attributed more to asset shifts to lower cost funds than to declines in MERs.
BruceCohen wrote:Several years ago Investor Economics did a report on Canadian and US MERs. I recall that some of the reasons they cited for the higher
Canadian cost were:
1. Asset mix: Much higher level of foreign content in Canada than in the US
BruceCohen wrote:2. More complex and cumbersome regulation
BruceCohen wrote:3. Vanguard effect in the US
DanH wrote:In Canada, I'm not sure that it could be said that we don't have a similar effect. PH&N is a sizeable company that is now well known among many investors. iShares are very cheap and do lots of marketing (though mostly to advisors).
The big differences, in addition to the above, are GST and the fact that U.S. funds are largely unbundled as Canadian funds were more than a decade ago. For example, U.S. funds either pay no trailers or come in various classes, each paying a different level of trailer fees. All are included in the standard fund databases.
Here, lower fee versions of load funds (i.e. F and I class units) are not included in the standard mutual fund databases. So, the averages are computed with load funds that are bundled with the cost of professional advice.
Using a new database, we study fees charged by 46,799 mutual funds offered for sale in 18 countries, which together account for about 86% of the world fund industry. We examine management fees, total expense ratios and estimated total shareholding costs (which include load charges). Fees vary substantially from country to country. To explain these differences, we consider fund, sponsor and national characteristics. We generally find that larger funds and fund complexes charge lower fees, as do funds selling cross-nationally, while fees are higher for funds distributed in more countries and funds from so-called offshore locations. Substantial crosscountry differences persist even after controlling for these variables. These remaining differences can be partly explained by a variety of factors, the most robust of which is that countries with stronger investor protection charge lower mutual fund fees....
As we can see, costs vary quite extensively from country to country. For example, using any of the three fee measures, funds domiciled and sold in Canada have considerably higher costs than those sold in its North American neighbor, the U.S. For example, mean management (TER) fees for equity funds are 79 (171) basis points in the U.S. versus 211 (287) basis points in Canada. Similar fee differences are observed for the other investment objectives. Looking at equities, the average management fee in the domicile with the highest fees (Canada) is 2.7 times higher than in the domicile with the lowest average fee (U.S.). The comparable ratio is 3.7 for TERs and 4.3 for TSCs. These results indicate that there are meaningful differences in fees across countries...
The U.S. and Canada are alike in many ways; in the fund industry, both are ‘closed’ fund industries that do not easily permit foreign domiciled funds from selling funds in their countries. However their mutual fund fees differ dramatically. From Table 5 we can see that, after controlling for fund type, fund size, complex size and other variables, the U.S. is among the lowest cost countries (by fund registration) in our sample, and Canada is the single highest fee country by far...
Several key findings emerge. First, while the fund product is similar around the world, the prices charged by funds are very different from place to place. Even neighbors, like the U.S. and Canada, can have remarkably different fees. Second, these differences persist after controlling for various fund characteristics aimed to measure differences in production costs. In fact, we find little evidence of economies of scale manifested in management fees, but larger effects in total expense ratios and total shareholder costs. Third, one cannot ignore cross-border fund sales. In general, foreign competition is associated with lower fund fees...
Quite frankly, I am not sure what it will take to drop average MERs in Canada by 1% or so (allowing for GST, etc).
beaverlodge wrote:Quite frankly, I am not sure what it will take to drop average MERs in Canada by 1% or so (allowing for GST, etc).
Eliminate the advisor channel
Wait for the consequences
Do not return to the advisor channel
Then proceed accordingly
I wasn't aware that the rest of the developed world had managed to eliminate the advisor channel. Are you sure that's why MERs are so much lower everywhere else?beaverlodge wrote:Eliminate the advisor channel
What consequences would those be? Are they being experienced by the rest of the developed world that has apparently eschewed the advisor channel? If not, why not?Wait for the consequences
AltaRed wrote:So until we can get someone else, aka Vanguard, to set up ETFs in Canada and create some more competition along with Barclays, we can expect to continue to get soaked. Course we do have TD efunds, but that hasn't made that big of a dent in the system.
Maybe it is the uneducated masses who have a love/hate relationship with our big banks and their full service brokerage arms, and a seemingly paternal instinct that the 'experts' know best. Quite frankly, I am not sure what it will take to drop average MERs in Canada by 1% or so (allowing for GST, etc).
NormR wrote:I note that several low-fee fund families have set up shop in Canada only to fail.
Yeah, fine for us educated minority, but how to get the masses to flee the advisor channel in the first place?
I wasn't aware that the rest of the developed world had managed to eliminate the advisor channel. Are you sure that's why MERs are so much lower everywhere else?
What consequences would those be? Are they being experienced by the rest of the developed world that has apparently eschewed the advisor channel? If not, why not?
Maybe some of us are just tired of hearing one more iteration of the same arguments, Dan. Not commenting on the paper does not necessarily mean I(we) unreservedly accept it. Hmmm?And what's most striking is how the DIY crowd here just accepts their conclusions without any apparent scrutiny because it sort of supports "the cause" so to speak.
That may be because it's unavailable to the great unwashed. Where's the "free" version?DanH wrote:Survey shows we pay twice U.S. rates I had hoped to get a little more coverage in that article
Well even if one accepts your two points, it's still the case that Canadian mutual funds are the most expensive, albeit by a narrower margin. Is that explained only by our plethora of provincial regulators, bilingualism (other countries like Switzerland and Belgium are also multilingual), and that damned GST (other countries have VATs that make our GST appear trivial)?So, not such a big story after all.
The Wealthy Boomer wrote:The other telling quote was the one by Jim Rogers about how the banks could have helped drive over all costs down but chose not to.
Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.
If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.
Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.
Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.
And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.
In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen.
For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening.
Jon in his blog entry for today wrote:the ICI in Washington has noticed fees on U.S. funds have dropped by 50% since 1980.
A recent ICI Study (Total Shareholder Costs of Mutual Funds: An Update; September 2002) updates other studies it has provided over the past four years, purporting to show the costs of mutual fund ownership. Once again, the study relies on the sales-weighted costs of funds, rather than the more relevant asset-weighted data. Once again, it fails to report the continuing rise in fund expense ratios, or even present those expense ratios for analysis. Once again, it ignores the impact of low-cost index and institutional funds. Once again, it relies on sales charge calculations that appear to significantly understate this component of annual costs. And once again, it ignores three extremely large components of fund shareholder costs (financial adviser fees, portfolio turnover costs, and out-of-pocket fees).
Yet industry expenses are not only not being reduced, they are soaring. Since 1980 the annual expense ratio of the average equity fund has risen by more than 40%—from 1.10% to 1.57% of fund assets. It has been documented, well, everywhere. But, the industry takes the position that the cost of fund ownership is declining. Or that's what the industry's Investment Company Institute says. What it means is that, according to its rather tortured and convoluted methodology, the cost of purchasing equity funds has, in fact, declined, from 2.25% annually in 1980 to 1.49% in 1997. The industry reaches this conclusion by including sales charges plus expense ratios, and then weighting the results by the sales volume of each fund each year. High cost funds that don't sell don't count. Virtually ignored in the ICI methodology, the managers of funds that investors shun nonetheless prosper, even as their shareholders suffer.
Shakespeare wrote:Maybe some of us are just tired of hearing one more iteration of the same arguments, Dan. Not commenting on the paper does not necessarily mean I(we) unreservedly accept it. Hmmm?
Well even if one accepts your two points, it's still the case that Canadian mutual funds are the most expensive, albeit by a narrower margin.
Is that explained only by our plethora of provincial regulators, bilingualism (other countries like Switzerland and Belgium are also multilingual), and that damned GST (other countries have VATs that make our GST appear trivial)?
And what do you make of their contention that "countries with stronger investor protection charge lower mutual fund fees"?
Dan, the space constraints of an 800-word column preclude all sorts of subleties and context.
She noticed that while IFIC couldn't be bothered to try to refute the study that Dan in effect did the job for them. So kudoes to Dan.
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