I Am, Once Again, Disappointed With The Financial Post

Canadian mutual fund fees have again appeared in a misleading Financial Post story. This time – Canada’s mutual fund fees still highest of 24 countries by David Pett 16 May 2013 Financial Post Page 6

While the article clearly parrots the Morningstar “Global Fund Investor Experience
2013 Report” it seems to have missed an important comment included therein on page 14 of 172.

“One of the difficulties in comparing annual expense ratios across countries has been the development of unbundled fee arrangements, whereby an advisor is not paid a sales commission by the fund company in the traditional model but rather is paid a separate fee by the fund investor. When taken, this action has the effect of lowering official fund expense ratios since funds no longer need to collect money from shareholders to make advisor payments. It also has the effect of complicating expense-ratio comparisons, since the fact that the investor in a lower-cost fund may pay an additional fee to an advisor is not considered in Morningstar’s calculations.”

Emphasis added. More here: Morningstar report

Canada uses the traditional model and the US does not. That seems an important point to leave out and it is not the first time Financial Post has missed it.

See these too. Barbara Shecter 25 April 2013 and Fred Vettese 29 April 2013

The uninformed fee discussion is flourishing. A search for, {Canada “mutual fund fees”} generates thousands of hits, many recent. I seem to be picking on the Post but the other papers are at least as guilty of comparing pineapples and grapes.

As it is an important variable, and not described, I assumed that it would be difficult to find what the external fee paid to an adviser in the US might be, but I was wrong. Investment Executive and an IFIC submission to the OSC both have the fact needed. It is typically between 1% and 1.5% of assets.

Not surprisingly, the difference between Canadian MER (includes adviser fees) and American TEP (does not include adviser fees) is about 1.25%

The stories purport to show a valid comparison but do not provide or even include all of the necessary information to make such a comparison. The “incomplete comparison” logic fallacy is sometimes found in advertising. A responsible journalist should avoid logic fallacies that are used to persuade rather than inform.

If you compare price only and pay no attention to what value you get back for your price, you will make mistakes. Factory second parachutes are not cheap regardless of how little the price may be.

To make this an adult discussion, these three points at least should be addressed.

  1. If you get more, you should expect to pay more. For the clients who acquire substantially the same service in both jurisdictions, the cost of ownership is about the same. If you don’t pay for an adviser, your price is lower. Not too unreasonable, so why is it a point of contention?
  2. The Industry has some culpability. It is irresponsible and not businesslike of advisers to fail to disclose their fees. If I don’t know what you are doing for me, your price is too high. Tell me what you do and why that is important to me. If you don’t tell me what you do, I will always assume it is less. I cannot value what I cannot see. Tell me often. Remind me after that.
    Most people do not mind paying for value. If you have some that mind paying, they will be trouble. Send them away. Notice that you will not be able to tell where the potential trouble lies until you start to communicate your value and your price. The fault lies with you, the adviser.
  3. Does paying nothing create value? It is easier for Americans to drop out of advised services and pay no fees. For some that will have value, for others a cost. A valid comparison should address the value or cost to do so. Paying nothing is not value. I can pay less for a car with no brakes, but it would be unwise to say that I receive value for the omission.
    With money, it does not matter how much you pay for advice. Your account value matters. Focus on what is important, not on a single incident factor. Single point thinking is a logic error. Specifically, “causal reductionism.” It is the fallacy that results when the purveyor of the opinion assumes that there is one simple fact the explains the behavior. In this case “funds in Canada overcharge you” is implied. When comparing properly, there will be several reasons and the joint operation of all the reasons is necessary to establish truth.

The truth to be found is the answer to this question. Do persons that pay for advice end up with more money or less? How they get there is not very important.

While the Post stories are clearly not objective, even wrong, they may serve a purpose that has value. Advisers, pay attention. The defense to bad information is good information. Get busy. Develop your value proposition and then communicate both that and your price. To do so, you might find this useful. What do you get for the fund fees you pay?

Note: I have no practical reason to care about this subject but it is annoying to see rhetoric dispensed as fact. Sorry, but that is my personal preference. Others may prefer something else. Stephen Colbert’s “Truthy” comes to mind.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Follow on Twitter @DonShaughnessy

3 Comments on “I Am, Once Again, Disappointed With The Financial Post

  1. Well said.
    I recommend you write The Post’ editor requesting a more thorough analysis. What counts most is the fact that Canadians who get advice are demonstrably further ahead in wealth accumulation than those who are not: the Cirano Study from the Universite de Montreal to take just the most recent. It is summarized on the Advocis website.

  2. Thank you for this article, in Canada the public has been led astray by bad journalism when it comes to understanding fees. You have gone some way to setting the record to rights. On another glairing point that is overlooked is that the Canadian government taxes our mutual fund savings with GST/HST (even in registered tax defered plans) which is included in the fees but almost never talked about.

  3. David and James, thank you taking the time to read and understand the article and especially for your comments. I will consider writing something for the Post. If you get a chance, the piece that will run May 21 goes through a similar thought experiment in respect to the price of gasoline. Again, things are not what they seem. If you subscribe, you will receive it automatically by email.

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