Fee cut­ting ac­cel­er­ates

Re­cent re­duc­tions by ma­jor firms range from 5 bps to 55 bps

Investment Executive - - FRONT PAGE - BY ME­GAN HAR­MAN

mu­tual fund fees in canada are trend­ing lower. Height­ened cost dis­clo­sure and in­tense com­pe­ti­tion from a rapidly grow­ing range of low-cost ETFs have trig­gered waves of fee re­duc­tions by mu­tual fund com­pa­nies in re­cent months.

“Since Jan­uary 2015, firms rep­re­sent­ing 90% of as­sets un­der man­age­ment [AUM] i n the [mu­tual fund] in­dus­try have an­nounced fee cuts,” says Paul Bourque, pres­i­dent and CEO of the In­vest­ment Funds In­sti­tute of Canada (IFIC) in Toronto. “It’s a very broad trend.”

Al­though this trend has been un­der­way for sev­eral years, it has ac­cel­er­ated since De­cem­ber 2017. That month, three Toron­to­based mu­tual fund com­pa­nies — Sun Life Global In­vest­ments (Canada) Inc. (SLGI); RBC Global As­set Man­age­ment Inc.; and Man­ulife In­vest­ments, a divi­sion of Man­ulife As­set Man­age­ment Ltd. — and Mon­treal-based Des­jardins In­vest­ments Inc. an­nounced cuts in man­age­ment

and/or ad­min­is­tra­tive fees on cer­tain mu­tual funds. The amount of the re­duc­tions varies among funds and se­ries, rang­ing from five ba­sis points (bps) to 55 bps.

The lat­est round of cuts to fees builds upon pre­vi­ous re­duc­tions. A re­port that IFIC re­leased in Oc­to­ber 2017, which was based on re­search con­ducted by Toronto-based re­search firm Strate­gic In­sight Inc., states that the av­er­age cost of own­ing units in an ac­tively man­aged mu­tual fund dropped by six bps to 2.14% be­tween 2014 and the end of 2016.

The down­ward shift i n fees is good news for clients, says Mimi Lee, financial ad­vi­sor with TruFi­nan­cial Con­sul­tants in Markham, Ont., which op­er­ates un­der the um­brella of Mis­sis­sauga, Ont.-based Carte Wealth Man­age­ment Inc. “It’s al­ways good to have lower fees,” she says. “If com­pa­nies can trim what­ever they are spend­ing and put that money back into con­sumers’ pock­ets, that’s al­ways a good thing.”

Many fac­tors are con­tribut­ing to the de­cline. For one, the grow­ing reg­u­la­tory fo­cus on fee dis­clo­sure and trans­parency has led to greater aware­ness of fees among in­vestors. That’s prompt­ing many com­pa­nies to re-eval­u­ate the fees they charge.

“Peo­ple are see­ing how much they’re pay­ing more clearly than ever be­fore,” Bourque says. “We be­lieve that’s gen­er­at­ing more dis­cus­sion be­tween clients and ad­vi­sors around fees and what clients are get­ting for the fees they pay.”

New cost-dis­clo­sure re­quire­ments re­cently man­dated un­der the sec­ond phase of the client re­la­tion­ship model (CRM2) per­tain only to dis­tri­bu­tion costs rather than to man­age­ment fees and other fund costs.

How­ever, Rick Head­rick, pres­i­dent of SLGI, an­tic­i­pates that the dis­clo­sure re­quire­ments even­tu­ally will be ex­tended to in­clude the full cost as­so­ci­ated with an in­vest­ment prod­uct. Ac­cord­ingly, the re­cent fee cuts prob­a­bly have been mo­ti­vated, in part, by fund com­pa­nies’ ef­forts to pre­pare for that new re­al­ity.

“I do be­lieve that the in­dus­try needs to get to a place in which the en­tire man­age­ment ex­pense ratio is dis­closed on the state­ment,” Head­rick says.

The pro­lif­er­a­tion of lower-cost ETFs also has been a key fac­tor in the de­cline of mu­tual fund fees, says Dan Hal­lett, vice pres­i­dent and prin­ci­pal with Oakville, Ont.-based HighView Financial Group. Specif­i­cally, ac­tively man­aged and fac­tor-based ETFs have emerged, and these prod­ucts look sim­i­lar to mu­tual funds yet carry con­sid­er­ably lower fees.

“[ The new ETF cat­e­gories] really are try­ing to do the same thing [as mu­tual funds] at a high level,” Hal­lett says, “but one [as­set class] is sig­nif­i­cantly cheaper.”

With so much more com­pe­ti­tion i n the i nvest­ment fund space, Hal­lett says, “it’s not as easy [for mu­tual fund com­pa­nies] to get in­flows as it used to be, even in a long, ex­tended bull mar­ket.” Cut­ting fees, he adds, is one way for com­pa­nies to at­tract AUM in such a highly com­pet­i­tive land­scape.

Hal­lett says he’s en­cour­aged to see mu­tual fund com­pa­nies com­pet­ing on price. Al­though price wars have been com­mon among U.S. mu­tual fund com­pa­nies, fees in Canada haven’t seen much move­ment his­tor­i­cally.

“Un­til the past five years, there was al­most zero price com­pe­ti­tion among re­tail mu­tual funds in Canada,” Hal­lett says.

For some mu­tual fund com­pa­nies, the abil­ity to re­duce fees has stemmed from growth in AUM, as strong mar­ket per­for­mance and in­dus­try con­sol­i­da­tion have helped to en­hance economies of scale.

“If you l ook at most of the fund com­pa­nies that have made moves [on fees],” Head­rick says, “a lot of t hem have en­joyed [AUM] growth be­cause markets have been friendly.” In SLGI’s case, the re­cent move to re­duce mu­tual fund fees was trig­gered by economies of scale that ma­te­ri­al­ized when the com­pany’s AUM re­cently sur­passed the $20-bil­lion mark, he says.

“In the as­set-man­age­ment busi­ness, a lot of your costs are fixed. So, as you grow your AUM, your ex­penses aren’t in­creas­ing at the same pace,” Head­rick adds. “So, there’s an op­por­tu­nity to share [the cost sav­ings] with in­vestors.”

More cuts in mu­tual fund fees could be forth­com­ing — es­pe­cially if con­sol­i­da­tion i n the in­dus­try con­tin­ues, Head­rick adds: “I wouldn’t be sur­prised if there are more [fee re­duc­tions]. With ac­qui­si­tions comes in­creased scale. So, you may see [the re­sult­ing cost sav­ings] be­ing passed along [to in­vestors].”

These cuts to mu­tual f und fees could trig­ger a higher level of in­flows i nto mu­tual funds, Head­rick says. How­ever, he points out, fees should not be the only fac­tor ad­vi­sors and their clients con­sider when se­lect­ing an in­vest­ment ve­hi­cle.

“I would hope that in­vestors and their ad­vi­sors are not just chas­ing l ower fees,” Head­rick says, “be­cause, ul­ti­mately, it’s the in­vest­ment per­for­mance and meet­ing your ob­jec­tives that count.”

Lee agrees that clients should avoid get­ting too fix­ated on fees and that the over­all level of re­turns should be a more im­por­tant con­sid­er­a­tion. “If you have a prod­uct with really low fees, but it’s not mak­ing you money, does that make sense?” she asks.

Al­though lower fees are a pos­i­tive de­vel­op­ment for clients, Lee is con­cerned about the im­pact that de­clin­ing rev­enue could have on the re­sources that mu­tual fund com­pa­nies have to spend on re­search and tal­ent.

“I’m hop­ing that [fund com­pa­nies] are main­tain­ing the level of ser­vices and re­search nec­es­sary to main­tain strong prod­ucts,” she says.

In Hal­lett’s opinion, the cuts to fees haven’t been sub­stan­tial enough to have any detri­men­tal im­pacts on the qual­ity of prod­ucts. In fact, fur­ther cuts are fea­si­ble, he says: “The very large com­pa­nies may have some room to squeeze more ef­fi­cien­cies out of their cost struc­ture.”

“The in­dus­try needs to get to a place at which the en­tire MER is dis­closed on a client’s state­ment”

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