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Ottawa asked to look at mutual fund costs

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Finance Minister Jim Flaherty plans to ask the Senate national finance committee to find out why Canadians pay higher fees to own mutual funds than Americans.

The decision follows a request by FAIR Canada, an investors' rights group, for a closer look into the price differences for these funds, which are used by many investors to save for retirement. Higher fees charged by funds can eat away at investor returns over the long term.

"The high cost of owning mutual funds impacts the ability of Canadians to adequately accumulate savings for their retirement," Ermanno Pascutto, executive director of FAIR Canada, wrote in a recent letter to the Minister.

Earlier this month, Flaherty asked the finance committee to examine why higher prices are charged in Canada for the same consumer products sold south of the border, despite the fact the loonie has been at or close to par with the U.S. greenback for a while.

Mutual funds "would be an issue that fits within that mandate," and that will be added to the request to the committee, Flaherty's spokesman Chisholm Pothier said Tuesday in an interview.

In its letter, FAIR Canada (Canadian Foundation for Advancement of Investor Rights) cited the fee differences in a survey released last spring by U.S.-based fund-research firm Morningstar Inc., which gave Canada a failing grade (an F) for fees. For instance, the report says the median asset-weighted management-expense ratio of equity funds in Canada was 2.31 per cent, compared with 0.94 per cent in the United States.

Pascutto suggested the Canadian regulatory system is partly to blame for higher fees because it doesn't require more transparency about the costs, which include the ongoing yearly commissions paid by fund companies to financial advisers as long as investors own the investments.

Most consumers don't understand the so-called "trailing commissions" that increase their fund costs, Pascutto said in an interview. "That is all happening behind the scenes where the client isn't really aware of where one firm is offering a trailer commission of half a per cent per year while another firm pays a one-per-cent trailer commission."

But Joanne De Laurentiis, chief executive officer of the Investment Funds Institute of Canada, disagrees with suggestions that Canadian fund fees are much higher than in the United States. Some differences stem from U.S. funds not charging a goods and services tax (GST) as Canadian funds do, and U.S. fund data including lower-fee funds sold to 401(k) retirement plans, she said.

In Canada, many investors buy mutual funds whose fees includes payment for advice, while many U.S. investors pay for advice separately from the mutual funds, she said. "The right comparison is what is the total cost of owning a fund between someone in the U.S. and in Canada."

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