Canadian Mutual Fund Investors: You're Being Hosed

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Brian Richards, who heads up part of the Motley Fool's international operations, and I were in Toronto last week. We stopped by Morningstar Canada to talk shop and meet the group's editorial team.

We asked about the differences between Canadian and American investors, and the talk quickly moved to something I wasn't aware of: How much more Canadian mutual fund investors pay in fees compared with their American neighbors.

"The typical American mutual fund charges, I don't know, maybe 1%," I noted. "What's a typical Canadian pay?"

"Double that, easily," Morningstar's managing editor Christian Charest told me.

That's no exaggeration. A few years ago, Morningstar put together a detailed side-by-side analysis of investment funds around the world. While Canada gets high marks overall, it's in a league of its own when it comes to fees. Here's Morningstar:

The typical investor in a Canadian equity fund pays a [management expense ratio] of between 2.00% and 2.50%.

The typical investor in a U.S. equity fund pays a total expense ratio of less than 1.00%.

The typical investor in a U.K. equity fund pays a [total expense ratio] of between 1.50% and 1.99%.

The typical investor in an Australian equity fund pays a [total expense ratio] of between 1.00% and 1.49%.

The typical investor in a New Zealand equity fund pays a [total expense ratio] of between 1.00% and 1.49%.

Why would Canadian investors put up with this? Morningstar sums it up in one utterly depressing paragraph:

Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the fees because they don't know how low these fees should actually be. Assets tend to flow into average- or higher-fee funds because Canadian investors use financial advisors to help them make decisions. Advisors direct client assets to funds that pay better trailers. And since the trailer is included in the [management expense ratio] the result is that assets flow into higher-fee funds.

Jonathan Chevreau, editor of Canada's MoneySense, puts it more bluntly:

American investors can find no-load mutual funds with MERs under 0.25%. Canadian investors can't. For this, Canadians have only themselves to blame. We aren't price sensitive. We either don't know what we're paying, or we don't care. If the customer doesn't care what the product costs, the producer has no reason to economize. High MERs mean better incomes for investment managers. They mean bigger profits for fund companies. They mean larger trailer fees for brokers. They mean fat advertising budgets. In the long run, everyone is happy -- except the customer.

There are options, of course. Canadian investors can purchase a Vanguard ETF that tracks the FTSE Canada Index with an annual fee of just 0.11%, or about one-twentieth the fee of a typical stock fund. Vanguard ETFs that track the S&P 500  charge an annual fee of just 0.05%, or $0.50 for every $1,000 invested.

Over time, these numbers make the difference of a nice retirement for you or a new Ferrari for a fund management company's vice president:

Source: Vanguard.

Fred Schwed wrote the classic book Where are the customers' yachts? to describe Wall Street's ability to put fees ahead of their clients' best interests. Turns out he should have looked a few hours north. 

The article Canadian Mutual Fund Investors: You're Being Hosed originally appeared on

Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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