Canadian Fees Among the Highest in the World.

Fees and expenses have been shown to be the most consistent and reliable predictor of a fund’s net performance. The higher the fees, the worse the performance. In Morningstar’s Sep 2019 global investor study[1] on fees and expenses in 26 countries, the “Top” grade went to the lowest-fee countries – the United States, Australia and the Netherlands. “Above Average” rated countries included Switzerland and the UK and “Average” rated countries included, Japan and China. Canada was rated “below average”, alongside France and Germany. Only Italy and Taiwan were rated lower than Canada, with the highest fees at the “Bottom”.

The study calculates Canada’s average fee for commission-based advice on equity and balanced/allocation funds to be about 2% per year. This compares unfavourable to the US average fee of only about 0.60% per year. Canadians using commission-based advice should expect to pay 1.40% per year more than our American friends. On a $500,000 portfolio, that is $7,000 more per year for the same kind of advice. Assuming a 10 year time horizon, 3% real growth year and 2% inflation (for simplicity), the difference between the Canadian and US investor total fee for 10 years is about $135,000 in current dollar terms. Can you see why fees are so important to successful long-term investing?

Let’s look at it from a different angle. Experts generally agree that a balanced portfolio of stocks and bonds can be expected to return about 5-7% (with about 2% inflation) going forward; this is slightly more than half of what returns have been historically; and is primarily due to the very low interest rates and return expectation for bonds, along with a modest expectation for economic growth globally.

As discussed, many Canadian investors are subjected to fees of about 2% or more on an annual basis[2]. Using the above estimates, the 2% in fees represent up to 40% of the expected annual return. Think about it – regardless of how poorly the manager performs relative to the benchmark, the manager is taking a big bite out of your expected return.

That’s not all. The taxman will take a big slice of the remainder (income tax is based on nominal income (ie. including inflation)[3]. Inflation would consume most of the rest of the pie, as it eats into the purchasing power of investors. What you have left, you can spend. Of course, you pay HST on your consumption, and so, of your meager after-tax proceeds, you only really get 88 cents on the dollar.

Should there be any wonder why people have anxiety about their financial future? When we look at it like this, it’s not hard to understand why people struggle to save for retirement. What at first blush seemed manageable – a 5-7% nominal return with 2% inflation – becomes a very punishing prognosis; a prolonged period of flat or negative real rates return for investors.

What can you do about it? You cannot control the market return and it is very unlikely you can pick managers who can beat the market (see . Nor can we control inflation. We can defer taxes by increasing our contributions to RRSPs, TFSAs and RESPs. That is no-brainer. But, the easiest and most effective method of increasing the value of your portfolio at retirement, is to minimize the fees we pay.

[1] Morningstar Global Investor Experience Study, Sept 2019
[2] Asset-based fees, sales loads, mutual fund commissions, trailer fees, custody, trading and foreign exchange charges.
[3] This analysis assumes a taxable account. For RRSPs and LIRAs, the tax impact is felt when the money is withdrawn.

“The greatest Enemies of the Equity investor are Expenses and Emotions”.
– John C. Bogle, The Little Book of Common Sense Investing