Canadians: Unbundle Your Investment Fees

Ruth Saldanha: At the end of March, Morningstar released its latest Global Investor Experience Fee Report, which looks at mutual fund fees across the world and compares fees across different markets. Now, Canadian investors continue to get a below-average fee experience. Part of this is because Morningstar favours an unbundled fee. Now, what does this mean and what are the parts of the bundle? Do you have to pay for all of them? Morningstar experts, Ian Tam and Danielle LeClair, are here today to help us make sense of this. Thank you both for being here today.

Ian, let me start with you. What's the meaning of a bundled fee and what's included in all the components?

Ian Tam: Thanks, Ruth. So, to be clear, a bundled fee refers specifically to what is charged when an investor purchases a commission-based share class of a mutual fund from an advisor. Now, for these share classes, investors are charged what we call a management expense ratio, or MER, which is effectively a percentage, and that's going to be roughly 2% for balanced funds in Canada, and that percentage is deducted from your total that's invested in that fund every single year. And that fee includes a portion that's paid to the portfolio manager for actually managing your assets, a portion that's paid to the advisor for providing advice as well as distribution, as well as operating expenses for the fund and as well as some taxes. So, when you purchase a commission-based share class, the investor does not get the option to opt-out of paying for advice. So, in essence, that service or that advice is bundled in with the cost of owning the fund, whether you want it or not and whether or not you received good advice.

Saldanha: Let me come back to that. Danielle, before that, why does Morningstar favour unbundled fees?

Danielle LeClair: Morningstar's mission is to empower investors, and we believe that unbundled fees give them the transparency and the choice they need to assess how the costs of their investments impact their ultimate financial goals, in particular, disentangling the cost of advice from distribution costs. It's kind of similar to making a pizza and understanding the costs for a pizza, understanding how much it costs to deliver it and also how much you're going to tip the driver. When customers have all this information, they do decide what is worthwhile to them and what isn't. And we view fees as a similar thing for investors. Morningstar previously did report that investors benefit from good advice, but also that a lot of the time they're not getting any advice at all, let alone good advice. And for us, that's something that we think unbundled fees will help solve for them.

Saldanha: Now, Canada seems to have done a lot better in the rankings. Is this because fees in Canada have actually come down?

LeClair: Relative to itself, yes, we did notice that Canadian fees went down, and we noticed this across the board in equity, fixed income and allocation funds, which is really great to see. There are a couple of different reasons why this could have happened. We also saw, for example, an increase in ETFs which tend to be lower fee vehicles being issued by companies in between this report and the previous report. We also saw that investors continued to be interested in these lower-fee vehicles and put their money towards these different types of products. Given the newly implemented Client Focused Reforms are being focused on making suitable recommendations for investors, we consider the transparency of fees a part of that, and likely, this trend will continue as a result.

Saldanha: Ian, coming back to the whole bundled structure, how can Canadian investors unbundle in a manner of speaking. Put another way, how should I value advice and pay for it?

Tam: Yeah, a great question, Ruth. So, one way to unbundle is to seek advice from what's called a fee-only advisor. These advisors are paid a flat fee, typically to provide an investment recommendation, but they don't actually provide the sale of a fund or a product. So, by nature, when you uncouple the advice that you're given from the sale, it serves to reduce the potential for a conflict of interest essentially. Another option is that if you see that your current asset level or the amount of money you have to invest is big enough, you might want to ask your advisor whether you qualify for a fee-based account. And under this structure, the advisor purchases – typically, purchases F-class shares of mutual funds into the account where that MER that we talked about earlier does not include a fee for advice and instead an overall account fee is charged outside of the MER on your total asset base, so across multiple funds. So, that does require a bit of a larger investment base typically to qualify for that. So, do check with your advisor.

Now, if you're an investor just getting started and perhaps have a smaller amount of money to invest, and you are looking for a bit of guidance, you might consider looking at the various robo-advice platforms that are now available in Canada. These platforms do charge an advice fee, which is less than what an advisor would typically charge you, and in concept that advice fee is not bundled with the assets held into your account which are typically going to be lower-cost ETFs, and ETFs inherently don't include any commissions or fees for advice and distribution.

Saldanha: So, lots to think about there with regards to fees. Thank you, Ian and Danielle, for joining us today. For Morningstar, I'm Ruth Saldanha.