Columnist image
Dale Jackson

Personal Finance Columnist, Payback Time


The umbrella group for Canada’s securities regulators announced this week that it will merge the responsibilities of two watchdog groups that oversee investment dealers and mutual fund dealers into a single entity.
Combining the Investment Industry Regulatory Organization of Canada (IIROC) with the Mutual Fund Dealers Association of Canada (MFDA) is expected to save industry members $500 million over a decade. But there’s little to suggest any of those saving will be passed along to fee-burdened mutual fund investors, or that serious measures will be taken to untangle a confusing fee structure.
According to a statement by IIROC President and Chief Executive Officer Andrew Kriegler, the new one-stop regulator will “better protect investors, increase access to advice, and support innovation.”
It will also continue to be self-regulating; meaning profits for the investment industry will continue to take priority.
The announcement was made one week after the MFDA released a report from U.K.-based Behavioural Insights Team showing fewer than 25 per cent of Canadians understand how much they pay in fees based on their regular fee summaries.
The report recommends further cost reporting beyond the fee summaries required under the Client Relationship Model (CRM2) introduced in 2018, which among other things calls for fees to be expressed in dollar amounts in addition to percentages.
That may seem like a small concession but it’s not hard to see why the industry dragged its heels on dollar disclosure when you consider a typical annual fee (known as a management expense ratio, or MER) of 2.5 per cent for an equity mutual fund translates into an eye-popping $2,500 on a $100,000 portfolio of mutual funds.  
Those MERs could add up to tens of thousands of dollars as a portfolio grows over time. That’s tens of thousands of dollars not invested and not compounding over time.
MERs are based on the amount invested whether the fund makes money or not and pay for costs including management, administration and marketing.
Fees on Canadian mutual funds are among the highest in the industrialized world partly because a hidden advisor fee, also known as a trailing commission, is baked into the MER. It’s hidden so well that many discount brokers collect the fee for advice they never provide, even when a less expensive non-advisor version could be available.
The trailing commission is intended to compensate the advisor for “ongoing advice” and is typically one per cent of the amount invested. That translates into $1,000 a year on a $100,000 portfolio of mutual funds, which calls into question whether the advisor is recommending the right fund for a client or the fund with the best trailing commission.
Trailing commissions are banned in countries including the United Kingdom and Australia even for mutual funds sold through an advisor. After years of heel dragging, the practice of discount brokers collecting trailing commissions was recently banned by Canadian securities regulators, but the ban does not come into effect until June 2022. Even then, nothing compels discount brokers to offer non-advisor versions of mutual funds. In fact, nothing compels mutual fund companies to offer a discount version.
Most Canadians save for retirement through mutual funds simply because they remain the only investment vehicle to offer professional management and diversification to those with modest portfolios. Some funds produce stellar returns regardless of fees but most underperform their benchmark indices once fees are taken into account.
If mutual fund holders can manage to grow their investments despite the high fees, they can lower costs by diversifying their portfolios directly into stocks and other securities, or lower-cost exchange-traded funds (ETFs).
Until then, the cards are stacked against them.