VIDEO: The Wealthy Barber Returns

David Chilton is back with a new personal finance book. Among his many targets? Exorbitant mutual fund fees in Canada.

The Wealthy Barber Returns

10 years ago
Financial author David Chilton is back with a new book about how to take control of your financial life. 8:57

Bestselling author David Chilton says Canadians aren't well-served by exorbitant mutual fund fees, an epidemic in the industry that he says eat into returns over time.

In an interview on the CBC's Lang & O'Leary Exchange, he told CBC's Amanda Lang that the fees mutual fund companies charge Canadian investors to manage their money "are high by any common sense standard".

While fund managers get paid in a variety of ways, one of the most common is what's known as the Management Expense Ratio, or MER. That's the percentage of the fund's assets that goes to the fund manager, before any returns are given to unitholders.

A recent study by fund monitoring company Morningstar found that Canadian mutual funds have a median MER of 2.31 per cent. That's higher than those in most developed economies, including the U.S., where funds have a median MER of 0.94 per cent.

Industry advocates say that's a misleading comparison for many reasons, since the fund industry is a competitive marketplace and investors get all sorts of value-added management for their money. But in the interview, Chilton rejected those claims.

"There's pressure on the industry now to bring fees down and probably that's a good thing," Chilton said.

CBC business commentator Kevin O'Leary says Canadian funds are sometimes higher because of the nature of Canada's investment market. U.S. funds enjoy economies of scale from being larger.

But Chilton disputes that notion. "There's not a lot more work managing $2 billion as opposed to $200 million," he said.

(In the interest of full disclosure, O'Leary is chairman of O'Leary funds, a Toronto-based money manager.)

Chilton says there's no good reason for a Canadian equity fund to charge in excess of two or more per cent to buy widely available large-cap dividend-paying stocks. "That's nutty," Chilton said. "and … I don't meet anybody in the industry who denies that's nutty," he said.

Those costs can add up. Assuming an average five per cent annual return, $10,000 invested over 45 years in a fund that charges 0.5 per cent will mean $17,783 to the fund manager, while the investor gets $72,066. But if that management fee jumps to 2.5 per cent, the investor ends up making less than half what his professional help does, with $60,356 going to the manager and $29,493 going to the investor.

Chilton also expressed concern with some of the new Exchange Traded Funds coming to market. ETFs made a big splash when they came to Canada in the 1990s by allowing investors to cut fees by indexing major stock markets and get in and out of the funds easily, because they trade on stock exchanges themselves.

"The initial version of ETFs, broad baskets of securities to match major markets at a low cost, [they're] tough to argue with," Chilton said. "But I'm a little concerned about some of the new entries into the field."

That's because new ETFs are becoming niche products, getting involved in illiquid investments, with more and more derivatives underlying them — not simply baskets of common stocks as they were originally. That opens them up to all sorts of counterparty risks and has also caused fees to inch higher.

Click here to see the complete David Chilton interview, or watch the player above.