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Opinion

The mutual fund industry says fees have fallen. Have yours?

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A recent report from the Investment Funds Institute of Canada (IFIC) says mutual fund fees have plunged by nearly 30 per cent over the past decade.

The study, prepared by the Conference Board of Canada with data from research firm Investor Economics, found the management expense ratio (MER) for the average asset-weighted mutual find declined to 1.47 per cent from 2.06 per cent between 2013 and 2023.

MERs, which accounted for nearly $31 billion in revenue for the investment funds industry in 2023, are calculated as a percentage of the total amount invested in a fund to cover the cost of managing and operating it.

The report attributes the drop to reductions in management fees and investors shifting to lower-cost funds, but MERs on many mutual funds purchased through advisors remain closer to three per cent.

Fees on mutual funds sold in Canada remain among the highest in the industrialized world partly because a hidden advisor fee, also known as a trailing commission, is often baked into the MER.

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 funds for their clients or funds with the best trailing commissions.

That’s why trailing commissions are banned in countries including the United Kingdom and Australia. After years of heel dragging, the practice of discount brokers collecting trailing commissions was banned by Canadian securities regulators in 2022, but 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.

The best way to tell if you are paying a trailing commission is by simply looking at the letter that follows the name of the mutual fund in your account. As a general rule, funds that have a trailing commission will have an A (advisor) at the end, and the version that does not charge a trailing commission will have a D (discount) or another letter.

If the name of a mutual fund purchased through a discount broker is followed by an A, you are paying for advice you never get. The first step is to find out if your discount broker offers a D version of your fund. In some cases, they do, but they conveniently (for them) failed to provide you with the lower cost version. If your discount broker does not offer a D version, go the mutual fund company website and see if they offer a discount series. Not all fund companies follow the same lettering code, but the proof is in the difference in MERs. If different versions of the same fund show MERs with a difference of about one per cent, it really doesn’t matter what they call it. You want the less expensive version.

The report also noted that the average MER on fee-based mutual funds where the cost of advice and distribution is not embedded decreased to 0.89 per cent from 1.05 per cent between 2013 and 2023.

Those MERs are comparable to fees on passively managed exchange traded funds (ETFs), which the IFIC says held relatively steady at 0.32 per cent in 2023.