The sudden announcement that Investors Group will lower MERs
(the hidden fee an investor pays every year to hold a firms mutual funds) on
two thirds of their funds is a victory for retail investors (that’s you if you
own IC funds). The fees are being reduced by approximately 0.4% to 0.5% per
year. In short you will save approximately $450.00 every year for each
$100,000.00 in IG funds you own! Given IG has approximately $60 billion in funds
it manages, and using the two thirds ratio, that means Canadian investors will
see annual fees drop by a collective $180 million dollars annually!
As a backgrounder, IG is extremely large in the Canadian
Fund industry and has been known historically for charging MERs that were
relatively high compared to their peers. In fact, IG is a primary reason why
fund fees in Canada are deemed the highest in the developed world! Given the
size of IG you would have expected an economy of scale advantage that would
have enabled the firm to be a low cost provider in Canada. Instead, Investors
Group took the approach that Canadian investors are fee tolerant and either did
not care or did not react to very high fees. In short, small uninformed
investors are ripe for being fleeced on fees. In fairness to IG, that seems to
have been a smart bet over the past couple of decades. IG has built a huge
business by being everywhere with a horde of well trained sales people. The
sales pitch has been slick and having sales people coming into investors homes
has built a huge base of goodwill and trust. Almost every Canadian town has a
ball team, hockey team, or soccer team sponsored by the local IG office. In
fact, IG has been to fund companies as Tim Horton’s has been to coffee shops.....that
is if Tim’s charged $3.00 for a double double!
Investors Group has always downplayed fees and promoted the
softer benefits of having a financial plan and a trusted hand to guide
investors. At the same time, however, IG has kept fees high across the board.
If investors try to leave IG they often find themselves having to pay thousands
in penalties that the investor did not really understand. By selling large
quantities of funds with Deferred Sales Charges (DSC or Back-end Loads) IG has
reaped a windfall of profits even as dissatisfied investors have left. Which
brings us to the crux of the matter for Investors Group: Investors have been
paying the penalties, albeit not happily, and moving on to firms that charge
lower fees. Consumers have become more informed, thanks in no small part to
journalists such as Jonathan Chevreau (ex-National Post, Money Sense) and Rob Carrick
(Globe & Mail), and fee only advice firms such as Weigh House. As well
blogs, a new breed of low cost fund firms (Steadyhand, Mawer, ING, TD eFunds),
and a more cynical attitude towards big financial firms has helped spread the
story on fund fees in Canada.
How has this impacted Investors Group? For a long time now
the IG fund family has struggled to provide quality returns. Since returns are
shown net of the MER, the fund managers at IG need to overcome the impact of
the large fees when comparing returns with funds who charge lower fees. This
problem becomes even more challenging when fund performance is measured against
low cost exchange traded funds (ETFs are the fastest growing segment of the
fund market worldwide and in Canada). The result is that IG has amongst the
lowest percentage of funds of all the major fund families ranked in the top
categories by independent rating firm, Morningstar. Although very large, IG has
only 18% of funds ranked 4 or 5 stars out of 5 on the Morningstar scale. On
average fund families have 28% of funds ranked in the 4 or 5 category.
This has resulted in retail investors shunning the mediocre
performers. IG has had net outflows of funds for the last three quarters. In Q1
2012, year over year inflows dropped by 65%. When these types of numbers are
appearing it likely follows that the sales team at IG is starting to defect.
With sales driven by relationships, a salesperson often takes a large number of
clients with them when they defect. In the fund industry competitors will often
make it attractive for sales teams to switch firms. Being able to show existing
clients that a new firm has better ratings and lower fees is a big sales assist
for disgruntled sales people.
So, in the end IG is making the changes necessary to ensure
they can continue to retain sales teams. They are not making changes in order
to benefit investors nor are they reducing the fees on all their funds. What is
happening is that IG is being forced to acknowledge that the days of fat profit
margins and poor performance are threatened. IG is a smart company and they
will spin their decision to seem more consumer focused than it is. The way to
force changes is to threaten profits and thousands of small investors have done
just that! It is the first small step in a long journey but it is a welcome
site for all investor advocates.
In the end IG will act in an economically sensible way, as
they always have. The company still has a large profitable business and a large
well trained sales team. They will make revenue adjustments when forced to and
not a moment before. That is no different than a bank lowering a credit card
rate or a car company dropping prices. The main difference is that MERs are hidden
from monthly statements and thus consumer awareness is slower to develop. While
many advocates hold IG in contempt for gouging consumers for decades, the truth
is always somewhere in the middle. IG exploited a business opportunity which is
now being slowly eroded. As retail investors continue to become more
enlightened IG will find new areas to exploit. This is more evolution than revolution
but it is a great start on the road to a fair and level investment market for
Canadians.
In the meantime, congratulations to the thousands of
investors who voted with their wallets and forced a major change in the
behaviour of the fund industry! Keep up the great work!
mike
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