By Scott Ronalds

Morningstar recently published a comprehensive report on the ‘investment climate’ for mutual fund investors titled Global Fund Investor Experience. The report analyzes the fund marketplace in a number of countries around the world, highlighting the strengths and weaknesses of each.

Overall, Canada received a B grade and placed 7th out of the 16 countries surveyed. The topics of analysis, and the grades issued, were as follows (grades in brackets):

Investor Protection (A)
Transparency in Prospectus and Shareholder Reports (A)
Transparency in Sales Practices and Media (A)
Fees and Expenses (F)
Taxation (C)
Distribution/Choice (B+)
Overall (B)

Sure enough, it was our failing grade in the fees and expenses category (where Canada received the lowest grade of any of the surveyed countries) that dragged the overall score down. The following excerpt on the topic is sure to ruffle some feathers in the advisor community:

“Canadian investors do not pay much attention to fees. Canadian investors are comfortable with the high fees because they don’t know how low these fees should actually be. Assets tend to flow into average- or higher-fee funds because Canadian investors use financial advisors to help them make decisions. Advisors direct client assets to funds that pay better trailers. And since the trailer is included in the MER, the result is that assets flow into higher-fee funds.”

Given the heavy regulation in place in our industry, it’s not surprising that Canada scored an A grade in the investor protection and transparency categories. We would argue, however, that a key topic is being overlooked: transparency in client account statements. Few firms disclose any meaningful fee or performance information in their account statements, which are a key element of the ‘investor experience’. Nonetheless, we applaud the goal of the report, which is to begin a dialogue about industry best practices from the perspective of the shareholder.

We’ll take a stab at starting the dialogue. How would you rank the above topics of analysis in terms of importance to you? Do you feel that any other topics are missing? Post your comments below. And don’t hold back.