The Canadian financial services industry is known for its high concentration in a few large financial institutions and its costs being among the highest in the world.
According to the Morningstar Global fund experience (2009) study, the majority of Canadians who invest in mutual funds do not pay much attention to the levels of management fees. The study found that Canadians routinely accept high level of fees because they are not aware of just how much lower these fees could be. Since many Canadians use the service of financial advisors whose compensation comes from commissions on the mutual funds they recommend – commissions which are included in the cost of managing these funds, – the assets of clients tend to end up in funds that have the highest management fees. Thus, investors who do not have the time, desire, or proper knowledge to manage their own portfolios often fall into a trap of convenience which leads them to pursue very expensive, suboptimal solutions. To the financial detriment of countless investors, this situation has persisted for years and is still ongoing.
Most financial firms offer products or advice geared towards active management, which is to say products in which managers make investment decisions based on the selection of securities, sectors, industries or trends which they believe will beat their benchmarks return over time. The literature on this topic is vast.
- According to a study by Arnott, Berkin and Yee (2000), only 14% of equity fund managers in the United States have achieved higher returns than the large cap index over 20 years.
- More recently, Barras, Scaillet and Wermers (2009) showed that over a period of 32 years (1975 – 2006), only 0.6% of 2076 mutual funds (12 in total), after taking into account management fees, added value without this being due to chance.
- According to the latest report, SPIVA Canada 2012 (Standard's & Poor's Indices Versus Active Funds Scorecard), over the course of the last 5 years, only 2.7% of large capitalization Canadian equity funds outperformed the S&P/TSX composite index. (see also the SPIVA Canada 2011 report)
In short, the most widespread and accepted conclusion is that active management is nothing but a means of redistributing financial assets with higher fees than passive management. Consumers thereby have a strong incentive to gravitate towards investment solutions with lower management fees. Unfortunately, such solutions are generally unpopular with financial advisors because recommending them would significantly reduce the commissions earned.
Investment solutions free of conflicts of interest are quite rare. Virtually all firms and professionals have commercial interests which are not aligned with the investor’s long-term goal of compounding their savings. Financial planning options are overwhelmingly numerous, as are related sources of advice (newspapers, advertising, the internet, friends) and it is difficult for individual investors to clearly see and understand their choices.
So, what is the savvy investor to do? Idema Investments offers portfolio management and advisory investment services that take all of these issues into account and puts the worried mind at ease. For more information, please visit Our Services page.