One way or another, there are costs associated with all forms of investing. But, according to a recently published Canadian Securities Administrators (CSA) research study, roughly half of Canadian investors surveyed were not even aware they are paying fees. (The CSA is the umbrella group for Canada’s 13 provincial and territorial securities commissions.) The same study revealed that 82% of respondents believe having a better understanding of investment fees would help them make more informed decisions.
Commenting on the study, Louis Morisset, chair of the CSA, and president and CEO of Quebec’s Autorité des marchés financiers, observed “there is room for substantial improvement in the investing experience, especially in understanding the impact of fees on investment returns.” There is no indication the investment industry will voluntarily take meaningful steps to address this shortcoming. But Morisset and the CSA could foster significant improvements in investor understanding of fees and promote better informed investor decisions by requiring the investment industry to take the following simple steps.
Simple, transparent declaration of fees and charges
First, require investment providers to prominently make the following declaration to clients prior to purchase of investment products as well as in annual client statements: “Investment fees and charges, including fund expenses (management expense ratio or MER) and advisory fees, can have a significant impact on your investment returns over time.” Along with this declaration, invite clients to determine the impact of fees under various scenarios and time frames using an online CSA Investment Fee Calculator similar to British Columbia Securities Commission’s user friendly InvestRight calculator.
Second, within annual client statements, require investment providers to prominently display individual investment product costs, and the dollar total of all direct and indirect fees and charges incurred by the client during the year.
These two steps would highlight the importance of costs, provide clarity on total charges, and perhaps most importantly, provide investors with a simple tool to bring to light the significant impact of costs over time.
With the benefit of this information, some investors will no doubt conclude they are paying a fair price given the products and services they receive, including any accompanying financial advice provided. But others may decide their cost/benefit equation is not satisfactory, and seek some combination of improved value and/or lower cost solutions. This, in my view, would in turn lead to needed improvement in the quality and cost of industry offerings and, ultimately, larger retirement nest eggs for Canadian investors.
I encourage you to give the InvestRight calculator a try. It currently demonstrates the impact of fees over only a single investment time frame—20 years—but you will get the idea. And you may be quite surprised by what you learn!
In the above scenario, the InvestRight calculator compares the total return on a $100,000, 20-year investment earning an annual average of 5% before fees. Assuming a 0.5% annual fee, the total end value to the investor is $252,023 ($100,000 in return of principal and a $152,023 net gain). Assuming a 2% annual fee, the total end value to the investor is $186,031 ($100,000 in return of principal and a $86,031 net gain). This analysis excludes any consideration of tax and inflation.
The study is in and the results are clear. Investors need fee transparency and the CSA has the power to make it happen. Mr. Morisset, Canadian investors deserve nothing less.
Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing.
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