Investors are pushing back against high investment fees, leading to closures of funds that charge more.master1305/iStockPhoto / Getty Images
Canadian fund fees have fallen steadily in the past decade as investors have migrated to lower-fee options, boosting competition and forcing asset managers to shift their offerings.
With new fee transparency rules set to take effect next year, pressure on fund managers and advisors using high-cost products could increase.
Morningstar Canada’s 2025 Canadian Fund Fee Study found investors migrating to cheaper passive strategies. From 2015 to the end of 2024, passive funds whose fees are in the lower half attracted 93 per cent of net flows, the report says, $190-billion more than funds in the more expensive half.
Fees on the cheapest passive funds now range from 4 to 16 basis points, the report says. For all funds, the average management expense ratio (MER) has fallen to about 0.90 per cent from about 1.15 per cent since 2015.
The report also found that almost half of all passive funds with fees greater than 0.50 per cent were either merged or liquidated over the past decade.
“The cheapest funds are far more likely to survive than more expensive funds,” says Ian Tam, director of investment research for Morningstar Canada.
The report cites two regulatory changes that promote fee transparency and awareness – the introduction of the second phase of the client relationship model (CRM2) in 2016, and the client-focused reforms in 2022 – as contributing to the cost reductions.
More fee transparency is on the way with total cost reporting (TCR), the third phase of the client relationship model (CRM3). Beginning next year, fund companies will be required to track and disclose all investment fund-related fees as a percentage of net asset value in absolute dollars. Clients will begin to see those fees on statements beginning in 2027, including a breakdown of fund commissions paid to advisors.
Preparing for CRM3
Mr. Tam says he doesn’t think TCR, on its own, will “cause a big ruckus in terms of fees, but it does shine a brighter light into how much you’re paying for advice – specifically advice and distribution.”
The trend toward lower-cost funds was underway globally before TCR was discussed in Canada, says Carlos Cardone, managing director of Toronto-based Investor Economics, an ISS Market Intelligence business.
However, the regulatory change taking effect next year “is an incentive for advisors to continue to optimize portfolios and continue to lower the cost of ownership for their clients, if they can, [and] to select products that are better suited for the clients,” he says.
The shift to TCR “is a heavy lift for the industry,” says Ravi Ramaswamy, senior vice-president of global shareholder services at Franklin Templeton Investments Corp. It will require asset managers to gather and calculate all the data and then revamp clients’ statements.
But changes to product offerings and fees over the past decade are more about competition than regulatory change, he says.
“The diversification of our product shelf is something we’ve been actively working on for the past little while,” he says, including adding products ranging from low-cost passive exchange-traded funds (ETFs) to more complex alternative strategies.
ETFs have been “a growing part” of Franklin Templeton’s business, Mr. Ramaswamy says, but most of its active strategies are in both an ETF and mutual fund wrapper to suit different investor preferences.
The Morningstar Canada report notes that even active fund fees have fallen as companies such as Vanguard Investments Canada Inc. and BlackRock Asset Management Canada Ltd. released all-in-one allocation ETFs that drove prices down.
The most expensive fund of funds had the highest closure rate over the past decade, at 47 per cent, while the cheapest funds had a closure rate of 22 per cent. The cheapest fund of funds also captured 72 per cent of inflows.
Liquid alternative funds were an exception as they’re newer and more complex.
“You have to pay for that. It just costs more to manage those funds,” Mr. Tam says. “That’s really the only exception – everywhere else we’ve seen fee compression.”
The report also notes that fees for actively managed conventional alternative strategies “spiked” because of performance fees for fund managers.
Time to step up
As of September, Canadians had about $1-trillion invested in commission-based share classes that automatically pay a portion of fees to advisors, the Morningstar Canada report says. As a result, investors pay about $10-billion in annual fees on these bundled funds.
“Fees are important; they’re the only factor influencing performance that investors can control,” the report states. “You can’t predict performance, but you can decide what to pay for it.”
Mr. Tam says the regulatory changes around fee reporting, as well as proposals that would make it easier to move investment accounts to another firm and for discount brokers to provide recommendations, will put pressure on advisors.
“As an advisor, you have to step up your game,” he says, adding that the changes and proposals will “definitely increase competition for the better amongst advisors.”
One of the next steps as asset managers prepare for TCR is to educate dealers and investors on what the fees on their statements mean, Mr. Ramaswamy says, as it will differ depending on the type of investment.
“It’s important to understand fees, performance – what are you getting for it? That’s where an advisor and the dealer come into play. Proper education is important,” he says.