This week RBC/PH&N announced they are reducing their management fees. Eight of the funds that are sold directly to investors are affected. This good news comes from the dynamic duo of low fee mutual funds. PH&N has been a leader in the direct-to-client part of the market forever and in recent years the bank has been more progressive in refining the fee schedule on its Royal Funds. Their ‘D’ series funds offered through RBC Direct Investing have amongst the lowest fees in the industry.
Post announcement I was asked by the media if mutual fund fees need to come down? And does this announcement signify a trend? I answered Yes and No.
Yes, mutual fund fees overall need to come down. The global studies show it and our experience confirms it - Canadians pay too much. In a world where the risk-free rate of return is 4% (i.e. Government of Canada bonds), fees of 2½ -3% don’t make sense. Some areas of the market are worse than others. For example, the average fee for a balanced fund is well over 2% despite the fact that they hold a large component of fixed income investments. Canadian balanced funds have traditionally been priced like equity funds, which is excessive.
Is it a trend? Certainly, the announcement is another positive data point, but I don’t think the haphazard array of announcements we’ve see from the industry so far could be characterized as a trend. As we said in a recent posting (Fund Fees Coming Down; Cost of Investing Going Up), the reductions have been modest and mostly represent “the ridiculous going to expensive”.
In the past, PH&N’s low fees have had frustratingly little impact on industry behavior, even as the firm grew in size and importance. Perhaps RBC will have more influence, although the other banks haven’t reacted to their previous reductions with any great haste.
Progress – yes. Trend – TBD.