According a 30-year veteran in the Canadian mutual fund industry, typical Canadian investors are either “not capable of grasping” or simply “refuse to believe” how MERs work.
Identified as commenter “MDB” on Ellen Roseman’s blog, this industry insider goes on to explain that mutual fund investors lose “60-80% of their total lifetime return because of MERs.” However, when he attempts to explain this problem to clients, they “glaze over, not wanting to understand this issue. If everyone they knew invested in mutual funds, that made it okay with them.”
Some of MDB’s clients believed “that a regulated product sold by a licensed broker could do no harm.” When MDB spoke to investors from other brokerages, “despite the prospectus in hand, they thought I was misleading them in order to discredit their advisor.” They would look MDB in the eye and say they were not charged MERs.
When a seasoned veteran can’t even convince investors that they pay MERs, the prospect of improving things with better mutual fund disclosure seems completely futile.
Existing mutual fund disclosure does help some investors, but maybe fewer than I originally thought based on MDB’s comments. Better disclosure would help more investors, which is a step in the right direction even if it doesn’t reach the majority of investors.
I’m more convinced than ever that disclosures must be expressed in dollars. If I were about to invest $250,000 of my savings with an advisor who recommends some DSC funds with a 2.5% MER, I should have to sign a sheet of paper with something like the following on it:
First year fees you pay: $6250.00
Estimated first decade fees you pay: $62,500.00
Early withdrawal fees you may pay:
1st year: $13,750.00
2nd year: $13,750.00
3rd year: $12,500.00
4th year: $11,250.00
5th year: $10,000.00
6th year: $ 7,500.00
7th year: $ 3,750.00
If someone reads and understands this information and then decides whether or not an advisor’s help is worth the money, then disclosure has served its purpose. However, if MDB’s experience is any indication, even this level of disclosure may not reach many investors.
@Dale: Thanks.
ReplyDelete@CC: Better disclosure may only affect overall numbers marginally, but it would make a big difference to a small minority of people. We could hope that over time the newly savvier people might spread their knowledge to others. Even if this isn't true I think that proper disclosure should be required to aid those who care to understand what they're getting into.
The second reply above is to Canadian Capitalist's comment below. His subsequent reply is further below.
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Your suggestion reminds me of a research project into fund MERs. Two groups of MBA students were asked to pick between 3 index funds. One group was given no instruction. The other included material that pointed out that fees reduce returns and information of how much fees will be paid for the 3 funds.
The researchers found that all the disclosure only made a marginal difference in the final picks.
That leads me to think that any level of disclosure will only make a marginal difference.
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@Michael: Agreed. Better disclosure is definitely better than the alternative.
Great stuff Michael. I don't own any MFs and those figures scared the heck outta me.
ReplyDeleteMark
@Mark: Maybe the numbers are so scary that people wouldn't believe them if they saw them.
ReplyDeleteIt's never enough to talk about MER and thanks, Michael, for keep on pointing the MER. In Canada, we pay ridiculous. It's much higher in US, on average I was reading of something like 60% and about 3-4x times more than in Europe. Yet people keep to ignore them. I know I did for a while, as a trade-in for peace of mind, but I was shocked to find out that my "investment agent" didn't even know how much I will be charged for backloads for early redemption - referred me to secretary. The funds were not listing year by year but only - up to 7%. Not many but we still have a few other options: low MER, no load funds performing really in the upper range.
ReplyDelete@Larry: You have a point. Maybe people have been seeing the light and have taken themselves out of the surveys by getting out of mutual funds. Whether or not it solves the world's problems, I'm a big believer in proper disclosure.
ReplyDelete@Thicken: Certainly financial education is a good thing. At the same time I think we should be changing disclosure rules to make them as understandable as possible to people who have poor financial education.
@Andi: It's a good thing that you understand more about investing costs now. This should make you better able to defend your portfolio.
The middle reply above is to Thicken My Wallet's comment:
DeleteWe keep putting the cart before the horse. What good is financial disclosure if people do not know how to understand it properly? More focus should be on financial education and literacy.
Look at the education portion of any securities regulator's budget. It represents a small portion of the entire budget. The focus is on fixing the problem after it occurred not preventing it before.
The first reply above is to Larry MacDonald's comment:
DeleteYet, there has been a considerable shift away from mutual funds to ETFs, so it would appear the public is getting smarter about this. I guess I tend to be more optimistic disclosure (and education) will help. It just takes a bit of time for everyone to see the light.
Great post. Putting costs in dollar terms makes a huge difference. I share the frustration with others in trying to explain to people that they are being ripped off.
ReplyDeleteWhat has worked for me is to refer people to books like "The Elements of Investing" by Malkiel and Ellis and to tell Bogle's story of starting the first index fund.