A recent study by two highly respected research firms shows that owning mutual funds costs about the same in Canada and the U.S. In both countries, the cost (excluding taxes) is around 2%.
This research is significant. In the past, comparisons between the two countries did not recognize some key differences in how the costs are packaged. In Canada, the costs of the product and of the advisor's time and support are all included together in the "Management Expense Ratio", which investors can find on their quarterly statements. In the U.S., many investors pay a separate fee to their advisors, and this fee-for-advice is not included in the so-called "total expense ratio" shown on their quarterly statements. Therefore, if you compare the cost on the quarterly statements from both countries, the Canadian number will always look higher because the U.S. number doesn't include all of the costs.
Are fees higher when they are charged separately?
The research found that many U.S. investors who pay for advice separately are paying more than they used to pay when the fees were included in the total charges. First-time investors and small to medium- investors are likely to pay much more for advice when it is charged separately, rather than as part of the product package.
The existing Canadian model serves investors well because they can easily identify their total costs and easily compare costs across funds.
Do separate fees mean more – or less – advice?
Unbundling of fees may lead to what experts call a "serious advice gap." A survey of more than 2,000 adults in Britain found that charging separately for advice was prompting many people to stop seeking advice.
As a result, many advisors in Britain are focusing on serving wealthier clients. Some experts predict that up to 5.5 million investors — 11% of the population — will not have access to advice as a result.
Why is financial advice important?
Credible research shows that having an advisor causes people to be more disciplined about their savings. This produces much better financial results for the investor. The difference can be as much as 2.5 times more wealth for people with advisors, compared to people that do not receive investing advice.
Without the discipline to save that is reinforced by having an advisor, people will save less, and they may not have enough for retirement, leaving them dependent on government programs. Average and small investors will be affected the most.
