digest
Short Summary
Main recommendation: Canadian investors should consider index funds, which are passively managed, rather than the high-fee actively managed funds that Canadian banks and commission-based advisors typically sell. Ben Felix explains that Canada lags the United States in passive fund adoption (11.3% of Canadian investment fund assets versus 34% in the U.S. at the end of 2016), and attributes this to incentives, regulation, and fee disclosure rules.
Key Points
- Canadian investors held 11.3% of investment fund assets in index and similar passive products at the end of 2016, compared with 34% in the United States.
- In 2016, Canadians added $10.9 billion to passive funds and $10 billion to actively managed funds, roughly even, while U.S. investors added $490 billion to passive funds and withdrew $326 billion from active funds.
- Canadian banks train and incentivize advisors to sell their own higher-fee actively managed funds, which are more profitable for the bank.
- Commission-based compensation has long rewarded advisors for selling high-fee mutual funds, and index funds generally pay no commissions.
- Canadian advisors operate under a "suitability requirement," not a fiduciary standard, so recommending a high-fee, commission-paying fund is legal if it is suitable for the client.
- Fee and performance disclosure rules were lax until recently, so many investors did not know what they were paying or how their investments performed.
Details Worth Noting
- Concrete instructions: The transcript gives no step-by-step instructions. Its actionable guidance is limited to the implied recommendation to consider index funds over high-fee actively managed funds, and to be aware of advisor incentives. Felix also says he will cover why actively managed funds struggle to beat the market in a follow-up video.
- "Suitability requirement" means an advisor must recommend products that fit the client's situation, which can still include high-fee funds. A fiduciary, by contrast, must act in the client's best interest.
- Registered Investment Advisors in the U.S., who operate under a fiduciary standard, manage around one quarter of U.S. investment assets and have been growing rapidly.
- New Canadian disclosure rules now require firms to send clients an annual report showing total fees paid and investment performance.
Bottom Line
Canadians have been slower than Americans to shift into index funds mainly because of structural forces: bank and commission incentives, a suitability rather than fiduciary standard, and previously weak fee disclosure. Recent disclosure changes may help close the gap over time.
