{"id":149,"date":"2015-02-23T09:05:02","date_gmt":"2015-02-23T17:05:02","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=149"},"modified":"2015-02-24T19:31:13","modified_gmt":"2015-02-25T03:31:13","slug":"will-innovation-or-regulation-drive-change-for-investors-in-canada","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/will-innovation-or-regulation-drive-change-for-investors-in-canada\/","title":{"rendered":"Will innovation or regulation drive change for investors in Canada?"},"content":{"rendered":"

One of the core\u00a0principles of Chalten’s\u00a0Evidence Based Approach<\/a> is that investors should not pay a professional money manager to beat the market by picking stocks or trying to time the market’s ups and downs. \u00a0Over the long run, it doesn’t work. \u00a0The\u00a0investment returns\u00a0you can expect to receive should depend only on how much and what type of risk you take, not on which stock you pick or which fund manager you use. \u00a0Furthermore, access to the stock market in a diversified, low cost manner is as easy as it’s ever been through passive index funds and ETFs. \u00a0So why hasn’t “passive” investing taken off in Canada the way it has in the US? \u00a0(When I say “take off” \u00a0there is still room for growth in passive investing south of the border, with only about 15% of market capitalization of US equities tied up in passive vs active funds and 3% of fixed income, according to Vanguard). \u00a0Index investing in Canada is relatively more obscure. \u00a0Using the size of the ETF industry as a proxy for the prevalence of passive investing, according to ICI, the Investment Company Institute, the US ETF market is $1.7 trillion compared to\u00a0$15 trillion invested in mutual fund assets, representing just over 11%. \u00a0In Canada it’s $78 bn vs $1.2 trillion or 6.5% of assets in mutual funds according to the Canadian ETF Association.<\/p>\n

While the prevalence of ETF funds may not be the best representation of passive vs active investing and ETFs are used for many other purposes, it is one of the indicators and\u00a0passive investing in Canada continues to lag behind the US. \u00a0At the end of last year John Rekenthaler at Morningstar Canada published an interesting insight, “What European — and Canadian — fund investors can learn from the United States” in which he lays out potential differences in the markets and why index investing has taken off in the US while remaining relatively obscure in Canada and Europe. \u00a0He highlights three conditions he believes are necessary for index investing to become more mainstream.<\/p>\n

1) The availability of funds (\u221a) – \u00a0in Canada there is now a large variety of low cost Exchange Traded Funds and index mutual funds. \u00a0Just recently, Blackrock added some new ETFs to its low cost Core family and Vanguard, the US giant of passive investing, has entered the Canadian market and is growing.<\/p>\n

2) Performance data (\u221a)\u00a0– fund returns in Canada are widely available and the evidence of the underperformance of active mutual funds is clear – we set out some of that evidence in Chalten’s\u00a0Evidence Based Approach<\/a>.<\/p>\n

3) Competition among advisors (?) – the third condition necessary for indexing to flourish is that advisors embrace indexing. \u00a0In the US,\u00a0\u00a0indexing didn’t really take off until competition among advisors brought passive investing out of the shadows and into the mainstream. \u00a0Advisors stepped forward to challenge the status quo and gave their investing clients the choice to invest in low cost market access products like those offered by Vanguard, Blackrock and Dimensional Fund Advisors. \u00a0In Canada, the number of fee only advisors advocating these types of products is very\u00a0low relative to the number in the US. \u00a0Furthermore, many Canadians don’t seem to be aware of the high fees they pay for mutual funds, often over 2% per year of assets under management.<\/p>\n

So how does the situation in Canada change? \u00a0In the US it evolved\u00a0because of increased competition and innovation among the advisor community and investment industry. \u00a0In Canada, regulators may seek to give the industry\u00a0a bit of a nudge from behind. \u00a0The new rules in Canada being put into place by the Canadian Securities Administraors called the Client Relationship Model (or CRM) will seek to provide better disclosures on fees and how advisors are compensated. \u00a0Many Canadians don’t know how much they pay or how they pay. \u00a0According to Environics Research, two thirds of Canadians who have a financial advisor either have no idea how much they pay in annual fees for the advice they receive or believe they pay no fees at all. \u00a0This strikes me as unfortunate\u00a0considering that annual investment fees could be one of the largest household expenses incurred and for some might be the largest annual expense after their mortgage payment. \u00a0CRM will seek to change this. \u00a0While we think that Canadians are diligent and innovative enough to seek out a better deal for themselves without help from regulation, the increased transparency that will come with CRM should help facilitate the move to a better place.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

One of the core\u00a0principles of Chalten’s\u00a0Evidence Based Approach is that investors should not pay a professional money manager to beat the market by picking stocks or trying to time the market’s ups and downs. \u00a0Over the long run, it doesn’t work. \u00a0The\u00a0investment returns\u00a0you can expect to receive should depend only on how much and what […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,7,12,13],"tags":[],"class_list":["post-149","post","type-post","status-publish","format-standard","hentry","category-all-posts","category-graham-bodel-posts","category-passive-vs-active-investing","category-regulation"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/149","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=149"}],"version-history":[{"count":4,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/149\/revisions"}],"predecessor-version":[{"id":154,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/149\/revisions\/154"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=149"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=149"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=149"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}