High cost of mutual fund management fees
A few percentage points to manage a mutual fund looks cheap enough. But while we pursue higher rates of return, and get confused by the myriad of mutual fund options, the fund companies are slowly and steadily taking over half your wealth. A Little Difference Becomes a Very Big Difference gives a good example of the impact.
Fees are fine if the performance exceeds the standard but this is not the case. A report by Canadian Investment Review shows the Canadian mutual fund industry underperformed the equity market by a dismal -2.6%.
“An important study finding is that, over the nine-year period from 1996 to 2004, the Canadian equity components of Canadian pension funds outperformed their Canadian equity market benchmark by an average +1.2% per annum, net of expenses. Over the same nine-year period, Canadian equity mutual funds with domestic mandates underperformed their Canadian equity market benchmark by an average -2.6% per annum, net of management fees, but before any applicable sales charges. Any such sales charges would reduce mutual fund net returns even further.
The main problem is the Canadian mutual fund industry charges fees of 2.56% which is huge compared to the world average of 1.29% World MER. Another reason is an attitude of customer indifference. Why offer anything new if the customer willingly buys the same old (and very profitable) product? Just look at the Toronto Maple Leafs as a shining example of how well this strategy works.
So what is the solution? Start looking at a managed portfolio of low cost Exchange Traded Funds, equities and bonds. Costs are lower and you gain flexibility options. You can use strategies often reserved for sophisticated investors to increase your income and protect against losses.
