The Fee Evolution

23 November, 2015

One thing we all need to learn to accept in life, is change. We see change every day, in all areas of our lives. The financial service and asset management industry is not exempt, as we are constantly evolving to meet the needs of the changing investor.

Long ago the asset management industry consisted of few broadly diversified funds. For instance, the company AGF started with a singular offering, (the American Growth Fund), the acronym from which is now the company’s name. Today, companies offer hundreds of products, each with a variety of purchase options and structures. It’s become so complex that attempting to understand them can be as confusing as trying to figure out the differences between varieties of yogurts at the grocery store.

One of the more positive changes we are seeing in the industry these days is in pricing. Although there is still confusion on this topic, we can be confident the industry is moving in the right direction. Price changes come as a result of pressure from the increasing popularity of the Low Cost Exchange Traded Fund (ETF) offerings. For those who are not familiar with ETF’s, these are low cost investments that track the performance of an underlying stock market, industry or other grouping. The price of an ETF is lower than a mutual fund. As of the end of 2014, it was 0.79% for the Canadian ETF industry versus 2.12% for the Canadian mutual fund industry. (source: the Vanguard Story 2015). Do not use price as your sole criteria, as there are benefits to active management. For example, Canada’s largest ETF had Valeant pharmaceuticals as one of its largest positions, in order to match the weightings of the stock market. This company dropped in value from $300 a share to just over $100 a share in the 3rd quarter. In this case lower cost did not translate to better performance. Investors have the potential to avoid this pitfall through active management.

Regardless, it is difficult to ignore the traction that lower cost options are getting. The original ETF created in the United States in 1993 has grown to more than $175 billion in assets. The industry itself has amassed $3 trillion US as of the end of October 2015. (source: cetfa) Canada is following a similar trend, growing from $3 billion in 2001 to over $86 billion as of October of this year. (source: First Asset & cetfa)

The growing popularity in ETF’s is forcing the traditional active management companies to focus on cost savings measures to remain competitive, and more companies are starting to offer them. I expect the trend to continue, and as it does, I would expect mutual fund companies to continue to lower their fees. This will only add to the positive changes in store for Canadian investors.

Greg Dowdall CFP®, CIM®, FCSI®, is a Senior Financial Advisor with IPC Securities Corporation in Lindsay. To download a free retirement readiness kit visit www.gregdowdallpresents.com