Are U.S. funds really cheaper?
Myths and
truths about fee differences
I often see
media articles state that U.S. fund fees are half of Canadian fund expense
ratios. Those defending higher Canadian fees cite our segmented regulatory
regime and the need to register with ten different provinces and three
territories – and file all documents in two languages. No doubt this adds a
layer of costs not present in the U.S. but the fee difference isn’t as big as
it seems; and regulation isn’t to blame for the bulk of Canada’s higher fees.
In Canada,
most mutual funds are sold through bank employees, financial planners (like
those with Sterling Mutuals), and
stockbrokers. In roughly 90 percent of the cases, the advisor selling the funds
is compensated via commissions that are embedded into its fees.
Several
years ago, Canadian mutual funds came in multiple classes – depending on the
level of commissions built into each. For instance, class A units were
front-end only funds, meaning that any up front commissions would have to be
charged outright against the amount invested. But they still had a small,
ongoing commission (i.e. trailer) built in.
Class D
units were sold with a deferred sales charge (DSC) and a stated level of
trailer fees. Because of the up front commissions paid by the fund company on
the DSC, this class of shares carried a MER that was roughly 0.75 percentage
points higher than the class A shares of the same fund.
In other
words, the difference in fees was entirely attributable to differences in
commissions built into each. The industry scrapped this multi-class structure
by 1996, claiming it was “too confusing” for investors. There was some truth to
that. Today, funds carry the fees attached to the old class D shares, but offer
the option of buying either on a front-end or DSC basis. Either way, you pay
the higher fee.
In the
U.S., this multi-class share is very popular for two reasons. First,
do-it-yourself investors are much more common in the U.S. Since they aren’t
expected to pay advisor-type commissions/fees, they simply pay a fee to buy and
sell funds, just as they would for stocks.
Second,
financial advisors typically recommend funds with no commissions or trailers
attached – similar to Canada’s F class shares – and choose to be paid by
tacking a percentage fee on top for the services provided to clients. So, they
actually break out the advice fee separately.
In short,
the assertion that U.S. funds are half as costly as Canadian funds is based on
an unfair comparison – i.e. between a Canadian fund with full advisory fees
included, and a U.S. fund including little or no advisory fee.
For a
refresher on Canadian fund fees, see this older
article.
Fidelity
Worldwide fund is a U.S. based fund, which is quite similar to the Fidelity
International Portfolio available to Canadian investors. Fidelity Worldwide
carries a MER of 1.05 percent, while its Canadian counterpart costs 2.52
percent annually.
Fidelity
Worldwide, however, pays no trailer fee or other commission. So, adding a full
percentage point is the only way to make a fair fee comparison. So, instead of
being more than double the cost, the U.S. fund (at 2.05 percent) is 47 basis
points cheaper than its Canadian cousin. That no chump change, but it’s a far
cry from double.
Mackenzie
Financial Corporation is one of Canada’s largest fund companies, but has a
small, emerging U.S. fund operation called Ivy
Funds.
Its Ivy
European Opportunities is virtually identical to the Canadian-sold Universal
European Opportunities. The U.S. Ivy fund carries a MER of 2.91 percent
while the Universal fund costs 2.58 percent annually. These are comparable
because both build in a similar amount of compensation for financial advisors
and are otherwise the same fund. But, in this case, the U.S. fund is more
expensive.
Finally,
take a look at Templeton Growth fund, which is available in both countries
under the same name. The U.S.
version carries costs ranging from 0.9 to 1.89 percent. The cheaper version
offers no built-in advisor compensation, while the more expensive one does. The
more costly version (class C shares in the U.S.) is comparable to the Canadian
offering of the fund, which carries a 2.26 percent MER.
Admittedly,
my illustrations cover a very limited sample of funds. However, if you use a financial
advisor and really want a fair comparison of costs, you’ll find that Canadian
products cost about 30 to 50 basis points more, on average, than similar
U.S.-sold funds.
To do your
own comparison, Morningstar.com is a
great source. And it will help to know that a 12b-1 fee on a U.S. fund is
analogous to a trailer fee paid on a Canadian fund.
The “twice
as much” assertion only applies if you neither want nor need advice. But even
then, there remain good funds from low fee firms such as Saxon, PH&N,
and Mawer that you can use to get exposure
and minimize fees.
Dan Hallett, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling
Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.