Every apples to oranges comparison that people believe leads to poor decisions. “Investment Executive” recently reported a comparison and recommendation from the Canadian Center For Policy Alternatives (CCPA) regarding mutual fund fees. Report Slams High Mutual Fund Fees.
CCPA found fund management fees are vastly higher than pension management costs. 2.1% to .38%. They did not mention that they should be. The direct comparison of mutual fund fees to pension plan fees makes no sense at all and they know or should know that. Here’s why.
- Does your mutual fund manager charge to manage the money? Yes and depending on the fund involved, probably more than the .38% pension plan administrators charge to do that. Economies of scale matter. Mutual fund investment managers will cost more like .6%. Similar to the Canada Pension Plan.
- Does the mutual fund fee at 2.1% include sales taxes? Yes.
- Does your pension fund provide personal service? No, but neither does the fund manager. A large portion of the total fee pays an advisor and a supervising dealer.
What does that get?
- Does the pension fund provide a financial plan? No. The advisor does.
- Does the pension fund manager deal with meetings and telephone calls regarding investment changes and changes in funding levels? No. The advisor does.
- Does the pension fund manager report on demand? No. The advisor does.
- Does the pension fund manager meet regularly to assess progress towards goals? No. The advisor does.
- Does the pension fund manager educate the plan owners? No. The advisor does.
- Does the pension fund manager call and persuade the plan member to make deposits? No. The advisor does.
- Does the pension fund manager help to address fear and other emotions when the market falls? No. The advisor does.
- Does the pension fund manager deal with things like marital breakup or illness or unemployment? No. The advisor does.
- Does the pension fund manager recommend investments based on a particular person’s risk profile and needs? No. The advisor does.
- Despite paying more, do people with advisors end up with more money? Yes! Coincidence?
It is possible that 2.1% is unfair, but the question of how much would be fair, is never addressed.
Comparisons such as this one ignore that a qualified advisor creates value in ways that are unrelated to the investment management costs. Apples and oranges.
In the same sort of comparison, an S-Class 550 Mercedes at $120,000 and Nissan Micra at $10,000 are both cars. Any rational person knows that comparing the price alone would be stupid. So it is with investment fund cost comparisons that ignore the value of the advisor and their supervising dealer. CCPA would likely point out that people who own the Micra would have a lot more money at retirement.
I imagine that reports like this one from CCPA are legal, but they are near fraudulent. If an advisor misrepresented facts to this extent they would be justifiably sanctioned.
Only a financially illiterate or malicious author could devise the comparison and pretend it has meaning. Only a naif could believe it has personal meaning.
Investors deserve better advice and information than this report. Advisors provide that.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.