I came across an interesting video on CBC News featuring David Chilton, Amanda Lang and Kevin OLeary.  They were discussing the high costs of Canadian mutual funds, as well as some of the pitfalls to avoid when using ETFs.  Its just over a year old, but well worth a look.

Highest Mutual Fund Costs

It starts off saying that Canada has the highest mutual fund costs of the 22 countries studied in a recent Morningstar report, meaning were paying more to invest our money than anyone else.  We pay a median price of 2.31% for equity mutual funds, compared to 0.94% in the U.S.

Fees matter.  Paying an extra one or two per cent per year in costs can take a huge bite out of your investment returns.  Consider this example of a $10,000 investment:

• With a 0.5% fee on $10,000 invested over 45 years, your money manager will make nearly $18,000 while the investor makes $72,000.
• With a 2.5% fee on $10,000 invested over 45 years, your money manager will make over $60,000 while the investor makes less than $30,000.

Chilton says the problem is the fees are embedded inside the mutual fund and so we dont even notice them.  It doesnt feel like a lot of money because its not like were writing a cheque to our advisor every year.

He says the bottom line is Canadian investors were unaware of fees for some time and weve become tolerant of mutual fund costs that are too high.

When stocks markets were soaring in the 80s and 90s, this wasnt a problem.  But investors have started to wake up over the last decade as the markets have struggled and lower cost products like index funds and ETFs have emerged.

Theres pressure on the mutual fund industry to bring fees down.  Investors Group, known for selling high MER products, reduced management fees on two-thirds of its mutual funds in 2012.

ETFs: The Good And Bad

The discussion turns to ETFs and Chilton describes how broad market index ETFs are good because their costs are just a fraction of most equity mutual funds. The problem, he says, is that over the last 5 years ETFs have gotten so niche-oriented and many of these products are not suited to the average investor.

Kevin OLeary brings up the point that many seniors are looking for income and most ETFs, particularly broad market ETFs, dont offer much for yield.  He says that since Income Trusts have been dissolved and corporate bonds are paying less than 4 per cent, the average Canadian senior cant live off their investment income anymore.

Chilton argues that you can still look for ETFs that emphasize dividends, like CDZ which tracks the Canadian Dividend Aristocrats Index.  This dividend ETF has a 0.67% MER and the yield is 3.62%.  But hunting for higher yield north of 4% is going to come with additional risk.

Hidden Fees

A dividend mutual fund, on the other hand, can cost you as much in fees as youre getting in yield.  Indeed, TDs Dividend Income Fund pays 2.02% yield and comes with a 2.02% MER.

Another problem in Canada is the management expense ratio (MER) doesnt capture all the fees.  There are deferred sales charges and front-end loads, not to mention tax inefficiencies when holding funds in a non-registered account.

Chilton goes off about some Canadian mutual funds charging up to 3%, which he calls outrageous and down right nutty.  OLeary, whose own branded mutual funds charge up to 1.9%, says 3% is an outlier and that Canadas a free market and weve accepted higher costs.

Bottom Line

Hopefully Chilton is right and Canadian investors are waking up to the fact that were paying some of the highest mutual fund costs in the world.  The more we can shift our investments towards lower cost index funds and ETFs, the more pressure the investment industry will be under to lower its costs.

When it comes to investing your money, high investment costs are your real enemy.  The more you allow the financial industry to take, the less youll have in retirement.

These are really important lessons for investors.  Heres the full nine minute video enjoy!