Let’s talk a little bit about the state of the mutual fund industry in Canada.

It is, in a word, craptacular. Can you imagine tying your career to selling high-fee funds in 2016?

We all know why, of course. Mutual funds, as an asset class, suck. When you’re only making 8% a year and then you have to pay a 2% fee, you’re not just sacrificing 2%. You’re giving up on hundreds of thousands of potential dollars. Funds used to get away with it because no alternative existed. That’s not the case today.

Fund managers are more afraid of looking bad than actually doing good, so they do silly things like window dress their portfolio, which is the act of selling under performing stocks and buying hot ones right before they have to disclose holdings to investors. Buying high and selling low is the exact opposite as what you want to do, guys.

Most funds stick to the world of large caps, which really makes it hard to outperform. I profiled a bunch of funds that have done well over the years, and guess what? They almost exclusively focus on small-cap stocks. It’s easy(er) to have an edge on a small-cap stock nobody is paying attention to. It’s harder to acquire said advantage about a company that has 100 analysts following it.

Guys like me continue to point out how the vast majority of funds stink, and you guys respond by not commenting about my rugged handsomeness and then pulling your cash out of funds and into passive, low-fee ETFs. Angels sing and everybody is happy. Well, everyone except for your local Investors Group agent.

So after doing an article for Motley Fool about how the industry is doomed unless they change, I started to scratch my head a little. It’s obvious the direction the trend is going. Why don’t Canada’s largest mutual fund companies follow it?

A massive opportunity

We all know the easy answer to why they’re not changing. It’s pretty damn lucrative to sell funds. Here’s a table showing us just how lucrative.

Company 2015 Profit
IGM Financial $781 million
AGF Management $48 million
CI Financial $553 million

And those are just the three mutual fund companies I can think of off the top of my head. Canadians are, collectively, paying billions of dollars per year into mutual fund fees. That’s a very strong reason to maintain the status quo.

According to the fee-only financial planning industry, there’s a very easy solution to these fund problems. A fee-only planner can act as sort of a financial cheerleader, helping someone make big picture decisions and whatnot. But they can’t recommend products because they’re not licensed.

But at the same time, I’m not convinced this is the perfect option for many people either. Most people don’t really need somebody to help them with budgets or figuring out goals. They don’t really need help with asset allocation either. They basically just need somebody to confirm what they’re doing and make sure they don’t panic when the market craters. Is that really worth the $1,500 to $3,000 some fee-only planners charge?

I wouldn’t pay it.

There’s a massive opportunity that exists for existing mutual fund reps to put a client in a basket of ETFs, charge a reasonable management fee of say 0.50% on top of low ETF fees, and make money. Not as much money as before, mind you, but still a decent amount of it.

 

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IGM Financial–the obvious choice

Investors Group should really be trying this. I used to own the stock of IGM Financial, the parent company, because it’s a great business The advisor gets the client to show up and buy funds. They then have the opportunity to sell them insurance, mortgages, other loans, and so on. It wouldn’t be hard to expand the business into something recommending bank accounts, credit cards, or something else.

Think of it like a grocery store. A store doesn’t make much on stuff on sale or on milk, but it makes up for it by selling overpriced cakes and deli meats.

IGM could even keep such a venture completely separate from Investors Group. Call it Slash Investments or Tech Co or some other such nonsense, and use the still healthy profits generated by the full-fee part of the business to market it to savvy people who don’t want to be ripped off by fees. A few million bucks a year would litter the Canadian PF-o-sphere with ads and attract a lot of potential business. It would also generate a lot of free publicity.

In 2015, IGM Financial paid out $558 million in dividends to investors. You’re telling me they can’t throw a few million a quarter towards building a true low-cost asset management business?

You’d have to run a leaner operation that Investors Group runs currently, which wouldn’t be hard at all. The average Investors Group office has like three people in it. Rent a little bigger space, give everyone a semi-private cubicle, and do 90% of all communications via email like everyone does in 2016. People will tolerate a little less service if they’re paying a reasonable fee.

Some companies are trying this, but they need to get better. I’ve heard of financial advisors putting clients in ETFs and then charging 1% a year to manage them. It’s a start, but they need to get those fees lowered.

I’m convinced a company like Investors Group is missing a massive opportunity by ignoring this market. Eventually, the current model is going to go away. It’s only a matter of time. By getting in on the trend now, it could iron out all the kinks while still enjoying healthy profits from the traditional part of the business. It’s better to act now before those profits go away forever.

Tell everyone, yo!