Why are mutual funds so expensive?

May 9 2007 by Ellen Roseman

In my Star column today, I talked about a study that said Canada had the highest mutual fund fees among 18 countries surveyed. Why? Consumers don’t understand what they’re paying for funds and how the fees cripple their returns over the long run. Meanwhile, financial advisers don’t offer any low-cost alternatives, such as index funds and exchange-traded funds.

It’s always fun to see the reaction, so here are some of the comments received. Let me know what you think.

10 comments

  1. Tony

    May 9 2007

    Hi Ellen, great article today. We have been saying this for some time…how come it takes an outside firm to get your attention?

    Please visit our website, http://www.ifacanada.com, where we are saying:

    1) index investing, when done properly, is the best way to go

    2) MER fees are maximum 1.65% with advisor help (average as low as 0.85% if no advisor is needed) and tapered down based on assets

    3) 20 portfolios based on risk-return expectations, not on guessing.

    Finally…you said it best why the fund industry still keeps growing. There is this mystical belief that just “having market returns” is not good enough.

    While fees, and everything else is important, the greatest enemy is still the investor himself. In the past ten years, the average dollar-weighted return of index fund investors was below 7% (Morningstar U.S. data) while the average index fund did over 9%. Investment education is still lacking.

  2. RC

    May 9 2007

    I agree with your comment 100% that advisors have no incentive to mention index funds or buying stocks directly. I have started buying index funds for my RRSP and after learning about stocks through a night school course, I began to buy stocks — nothing too risky, mostly bank stocks and Manulife.

    After buying the stocks through TD Waterhouse, I set up a DRIP program through the companies’ transfer agents. With the Bank of Nova Scotia, I purchase additional shares monthly and have all the dividends reinvested. It does take some time and a few phone calls and paperwork, but it is worth it. I track the stocks weekly and feel more confident that this is the way to invest, instead of taking an advisor’s advice. Also, stocks have no commissions or trail fees, so therefore all profits go into my pocket.

  3. AC

    May 9 2007

    I like today’s column. It reminded me of an incident a couple years ago. A bank guy who handles a bit of my money wanted to see my other investments, so I showed him the statement from my main account. His response, after a long pause, “Oh, I see you like ETFs.”

    I could tell he was just thinking that he couldn’t sell me those and couldn’t make any money off them.

  4. Canadian Capitalist

    May 14 2007

    AR: Of course, agents are not going to directly tell fund companies to pay them a higher trailer. But what they can do is recommend funds that pay a higher trailer to their clients over something that pays less. The fund company will get the message.

    Ellen: I totally agree with you that the reason fees are so high is because we keep paying them. We don’t bother to find out how much mutual funds are costing us (though our own performance chasing is costing us even more). Until investors demand low fees and vote with their wallets by opting for lower-fee funds, the industry has no reason to change.

  5. tom

    May 18 2007

    As a DIYer who is now a Financial Planner I can say this topic is
    a tough one to address. When you start out in the business it takes a long time to build up your client numbers to the point where you can afford to recommend nothing but index funds. I try to place clients into funds that have a history of strong performance relative to their benchmarks and low volatility with smaller losses in down markets. Most people who go to an advisor do so because they don’t want to be DIYers and are willing to pay the higher fees for my advice and services.

  6. Paul

    May 27 2007

    The only way mutual fund costs will go down in canada is it people in mass stop buying them, then they will have no choice but to reduce the costs.

  7. Michelle

    Jan 16 2009

    Craig, it is January 2009 and I see your funds have suffered as did the industry, so capping fees makes better returns?