Morningstar Inc. has just released a study of the mutual-fund investing experience in 16 countries, ranking Canada seventh.
Canada got a grade of F in fund fees, the worse of the countries in the study. Canadas management expense ratios in the range of 2% to 2.5% were the highest of the group. Mutual fund salespersons wont like what the report had to say about why fees are so high:
Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the high fees because they dont 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 MER, the result is that assets flow into higher-fee funds.
What pulled up Canadas score were As in investor protection and transparency. Such high scores seems a little odd, to me. I wonder if the Chicago-based research team missed the boat here.
OK, disclosure might be good in the prospectus and elsewhere. In fact, I have applauded the publication of disciplinary hearingsagainst wayward salespersons. But what about enforcement of investor-protection rules by regulators such as the Mutual Fund Dealers Association (MFDA)? The study seems to have overlooked this dimension — at least there didnt appear to be a category for gradingon the report card.
Some consideration of this aspect may have altered Canadas ranking. There seems to be a fair amount of anecdotal evidence that suggests as much. Just recently (May 13), for example, Barry Critchley wrote a Financial Post piece, MFDA’s sluggish side shows, complaining about MFDAs delays that allowed a mutual dealer to victimize its clients until it left the industry and was beyond the powers of the MFDA to punish it.
Many regulatory agencies in Canada are trade associations that have been given self-regulating powers. Sure, they catch abusive salespersons and impose fines, but the accused can escape the fines by simply leaving the industry. Heck, most of them dont even bother to show up for their hearings. There doesnt seem to be much of penalty in Canada for betraying the trust of mutual fund investors.
Get the full Morningstar report here.