In a 2015 global study by Morningstar, Canada's investment environment was rated the worst in the developed world when it came to Fees and Expenses. Don't worry, though, there's good news; our D- score is up from the F earned in 2014.
The real question is the implication of our less-than-impressive grade. Are we paying too much for our investments? What are we receiving in return -- and what are our options?
The Morningstar Report and How We Fared
The 150+ page report (titles the "Global Fund Investor Experience Study") measures twenty-five countries in four categories. It puts together analysis of over 500,000 different funds. The report grades countries on Regulation and Taxation, Disclosure, Fees and Expenses, and Sales and Media. Countries receive an A-F in each category, plus an overall score.
Below is the full list of the countries surveyed, and their averaged grade (ranked highest to lowest):
United States: A
The Netherlands: A-
United Kingdom: B+
New Zealand: C+
Hong Kong: C
South Africa: C
Canada received a C+ overall. Compared to the C- average, that isn't bad. We performed great in Disclosure, where our A- grade is among the highest. We stay committed to transparency by publishing full portfolios semi-annually; we offer clear expense information, histories, and illustrations of each fund's costs. That A- represents the awesome level of regulation that keeps Canadian investments safe.
Morningstar gave us a B- in Sales and Media, which is definitely above average. Canadian media emphasizes long-term investing, and often mentions different fund costs. We also enjoy low initial investments (our median investment minimum falls below the U.S. $500).
However, Canada received a D- in Fees and Expenses. That means we just barely fell behind China's D+, and far behind the U.S., which has maintained an A average since the first report in 2009. It's clear that Fees and Expenses has been holding us back from climbing up into the higher grades. Take a look for yourself; here are Canada's report cards from the past four reports published since 2009.
Why Our Funds Cost More
Morningstar studies two factors. They look at the opportunity available to investors in registering outside funds (available for sale), and the costs associated with national, domestically-grown industries.
In Canada, mutual funds typically combine administration fees and general costs into one annual fee. The breakdown isn't clear, and your investment returns are disclosed with the fee withdrawn. If you earned eight per cent and three per cent is taken off in fees, for example, you earned five per cent. However, usually investors only see the final five per cent, and not the gross returns before the fees.
Despite fees, mutual funds are a practical option. They're ideal for novice investors who want to access diverse holdings, but need advice. Automatized, pre-authorized contribution plans mean they're a convenient choice, and investors generally avoid transaction costs.
Mutual funds are also trying to provide more transparency since the report. They now offer householding options to larger accounts. Family members can bundle their investments under a single household, which brings down their overall management fees as a percentage. Unfortunately, the impact doesn't make a huge difference until investments total $250,000 or more.
Fees are a reality, regardless of the strategy you choose. Still, your investments need to work for you. Mutual funds aren't your only option.
What Are Our Alternatives?
Over the last decade, monetary flows have shifted from mutual funds to Exchange-Traded Funds (ETFs) and Separately Managed Accounts (SMAs). More investors are reaching retirement, which means they're concerned with the overall cost of their returns. ETFs and SMAs offer a lower-cost alternative, plus full transparency.
ETFs, especially, are taking over. The total inflow of funds into ETFs has grown like crazy since their inception in the 1990s. The Canadian ETF industry set a new record, with over $16.3 billion in inflows. The global ETF market increased over 10 per cent from 2014 to 2015. Assets double the numbers from five years ago -- and it's not slowing down. This report predicts that the Canadian ETF industry will grow to $250 billion by 2021.
ETFs are a low-cost alternative to achieving diversification, but they're mostly passive investments that come with their own risks. With recent market volatility (think China's deregulation of capital markets, and the U.S.'s uncertainty about raising interest rates), we've seen the importance of actively managing ETF portfolios.
For example, Canaccord Genuity draws on a database of over 3,500 ETFs when creating their managed ETF portfolios. That allows proprietary research into style, size, sector, liquidity, cost, and overall quality. Canaccord Genuity advisors can then pick the perfect portfolio for your specific financial goals.
Plus, fees appear as a fixed, transparent dollar figure on each monthly statement. There are no surprises. The cost breakdown is clearly disclosed, and non-registered accounts are fully tax-deductible.
Separately Managed Accounts (SMAs) are another interesting alternative to mutual funds. They're similar to ETFs, but SMAs give clients ownership to underlying stocks and bonds. These types of investments usually begin at $100,000-$150,000 per account, which allows portfolio managers to buy enough of each position.
The Complete Canaccord Investment Counselling Program (ICP) offers money management from over twenty totally diverse portfolio managers. We have the luxury of using one or more of these award-winning managers to create a custom portfolio, based on the needs of each client. Unlike a mutual fund, where the underlying holdings are hidden, the client also sees each security they own, and trades throughout the month.
Again, costs are entirely transparent. Detailed monthly statements and asset-based fees mean you'll never be kept in the dark. And knowing the full number means you can deduct that cost from your taxes as a financial consulting fee for all non-registered accounts.
To Sum It Up
There's been growing public (and regulatory) pressure since the 2008 financial crisis. Investment firms are working hard to make their offerings cost efficient and tailored to each client. Behind the fees, real human advisors are putting in time and effort to mould each portfolio into the best it can be. ETF and SMA portfolios are at the forefront of that movement. They will, over time, shape our investments to benefit all participants.
Should you have any questions and/or comments, feel free to connect with me directly: firstname.lastname@example.org
This article is solely the work of the author, not an official publication of Canaccord Genuity Wealth Management (CGWM). All information is given as of the date appearing in this article and the author does not assume any obligation to update it or to advise on further developments related. All information included has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CGWM assume any liability.
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