“The Single Biggest Problem in the World of Canadian Finance”

A seemingly modest investment-management fee is much more costly than it appears. Here’s why. Find more investment insights in the full episode with Ben Felix available on our website, YouTube and all podcasting platforms.

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I see so many Canadians paying 2.5%, 2%. Let’s just use 2% for easy math on a professionally managed mutual fund. And I’m frustrated with how a lot of people say, well, 2% doesn’t sound like much. You know, if you get 83 in school instead of 85 or 81, what’s the big deal?

But it’s not 2%, it’s 2% of the projected return of 8%, let’s say for Canadian equity fund. In other words, it’s 25%. Of the projected return. And so now all of a sudden the active money manager has to get 10 less than 2 to equal the market. But if they just equal the market at 8, you’re only getting 6. And again, you’ve lost 25 percent of that projected return over extended time frames on a compounded basis.

What that does is absolutely crazy. There’s a math prof who called me a little while ago and he said he has done so much studying on all this. And the high fees and actively managed mutual funds are the single in his mind, single biggest problem in the world of Canadian finance, bigger than poor savings rates, bigger than anything else, because they can eat away 30 and 40 and 45%, depending on the fee level of somebody’s retirement pool of capital.

Agree with all of that. And do you think we have to do a better job of teaching what I just said about how 2 percent is actually way more than it seems on the surface, We do I do agree. And we do need to do a better job teaching it. I think the other issue that gets missed there, though, is that it assumes that the average actively managed fund or the, say the median average, the median actively managed fund is going to get the market return. So that those active fund investors are getting the market return less than 2 percent fee.

But if you look at before fee returns, the median active manager is already underperforming the market because of the skewness issue that we talked about earlier. So that cost of active management is actually quite a bit higher than just the fees on their own.