An early draft of Mutual Fund Fees Around the World, by Ajay Khorana, Henri Servaes, and Peter Tufano, professors from the Georgia Institute of Technology, London Business School and Harvard Business School, respectively , claimed that Canadian mutual fund fees were the highest in the developed world. This was like Christmas morning for investor advocates and industry critics alike as it fed their belief that fund investors were being fleeced.

Although the paper’s early drafts date back to 2005, a final version was completed in 2007 and is slated to be published later this year. As I was perhaps the harshest and most vocal critic of this paper, I take a certain amount of pride in pointing out that its final estimate of Canadian funds’ total shareholder costs (i.e. management expense ratio, plus annualized loads) is 2.4%, about half of the earlier 4.7% per year estimate.

And while Canada is still shown to be a higher-fee country, we no longer stand out as the costliest for mutual fund investors.

Indeed, I was surprised at the number of times I saw specific figures from this paper’s early drafts quoted as if they were facts. But I also found myself wondering: Even if the paper’s figures are correct, who cares?

I’m reminded of one of my mentors, who used to ask audiences of investors: “Would you wade across a lake if it had an average depth of five feet”? This segued to a discussion of the risk behind, and the end-date bias of, compounded rates of return.

Similarly, quoting a country’s average mutual fund MERs and other fees can be misleading. A country with a fund universe sporting above-average MERs is not necessarily less investor-friendly than those with lower average fees.

Although the paper’s comparative fee data still have limitations, its figures for Canadian funds look accurate. But its estimated total shareholder cost of 2.4% annually for Canadian funds is meaningless, as it does not show the breadth of choice available for investors and advisors of all types (not to mention how that compares with other countries).

The vast majority of financial advisors are paid via product commissions. Accordingly, load mutual funds dominate the fund industry, both by number of funds and assets. Alternately, advisors who count themselves among the small, but growing, contingent of fee-only advisors have a large universe of F-series fund units (and other cheap products) that fit nicely with that model. And although most individual investors need and seek the counsel of advisors, there are many smart and savvy do-it-yourself investors who prefer low-cost products.

These investors, despite being in the minority, have a lot of choice courtesy of no-load companies and exchange-traded fund providers. For instance, a DIY investor can build a diversified portfolio (i.e. 60% stocks, 40% bonds) for less than 0.3% per year (if using index or passive funds). It is also easy to build portfolios of actively managed mutual funds for all-in costs of about 1% annually. Canadian investors can also access, from any Canadian brokerage account, cheaper ETFs and actively managed closed end funds on U.S. stock exchanges.

Hence, if an industry is supplying at least enough products to serve both DIY investors and advice seekers, then I would argue that there is little meaning in our average fees.

Although I believe there are far too many load mutual funds in Canada, the breadth of choice to suit different investor and advisor needs serves us well.

Dan Hallett, CFA, is president of Dan Hallett & Associates Inc., which provides a mutual fund
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