This backgrounder provides data on the household assets of Canadian
investors and the difference that access to advice can make in their
Who is the modest Canadian investor?
According to research conducted by Investor Economics and Pollara, Canada’s
typical modest investor:
* Belongs to the 79% of Canadian households with less than $100,000 in
investible (non-real estate) assets,1
* Is among the 7.9 million households in Canada that owns investments
through the MFDA channel,
* Is likely to have started investing with less than $25,000,2
* Holds his/her savings in a combination of investment funds, GICs, and
* Is likely to have purchased mutual funds through an advisor. In fact,
eight out of ten modest investors purchased their funds through an advisor. 4
Does financial advice matter for the modest investor?
Compared with investors who go it alone, investors who use financial
advisors see their savings grow by 2.9 times more after 7 years – and 3.9
times more if they continue to use advisor for 15 years.5
In addition to helping investors choose the right products to meet their
goals, advisors serve as financial coaches, helping investors to develop
disciplined savings habits and avoid common investor behavioural pitfalls.
90% of Canadian mutual fund holders invest through an advisor; 88% of
mutual fund investors agree they get better returns because of advice. 6
Charts that purport to show the negative impact of advice fees on long-term
returns erroneously assume that unadvised investors will contribute to
their savings at the same rate as those with an advisor, ignoring
behavioural research that consistently shows most individuals who go it
alone are less disciplined in their savings habits and more prone to
Other comparisons often fail to note that mutual fund fees often include an
advisor fee that must be paid separately when investing in products such as
ETFs through an advisor.
Research has also found that, over a five-year period, households who kept
their advisor saw a greater increase in their asset values than households
who dropped their advisor during the same period.7
Is there an advice-gap and why does it matter?
An advice gap can be measured in two ways: The ability of individuals who
want financial advice to find it at a price they are willing to pay; or the
difference between all those who would benefit from financial advice and
those who are actually working with a financial advisor.
By the first measure, there is no evidence of an advice gap in Canada
today. The availability of various fees payment options, especially
embedded commissions, enable Canadians of modest means to access affordable
advice proportionate to their assets.
The second measure can only be solved through education of the benefits of
advice and by ensuring that the industry can continue to provide those who
seek advice with the service they want at a price they are prepared to pay.
Investor Economics estimates the average embedded commission (trailer) to
be 0.78%, or $780 per year, for the modest investor with $100,000.
Compare this with fee-based accounts in the U.S. where the investor needs a
minimum of US$100,000 on which they will be charged 1.3%, or US$1,300
annually. With compounding, on an annual return of 5%, the difference
between 0.78 and 1.3 will add up to more than US$7,000 after 10 years.
The result is that
modest investors in Canada pay less in fees than modest investors in
for comparable funds.
MFDA research finds that typical front-end load domestic equity funds may
pay a 1% trailing commission and a front-end load domestic fixed income
fund may pay a 0.65% trailing commission. For modest investors, this
compares to fee-based channels, where rates generally begin at 1.5%. 8
UK regulators have admitted that reforms instituted there, including a ban
on embedded commissions, have created an advice gap for more modest
investors. Firms have increased their account minimums and new account
openings among modest investors (£30K – £100K) are down. The government is
now introducing a number of remedial measures that include letting people
withdraw up to £1000 from their pension savings without tax consequences in
order to pay for financial advice.
Canada and the World
Regulators have suggested that Canada is lagging the rest of the world in
banning embedded commissions. The facts indicate otherwise.
Banning embedded commissions has been evaluated by securities regulators in
many jurisdictions. Only four (Australia, the Netherlands, the U.K., and
South Africa) have opted to proceed.
Securities regulators and governments in 10 other countries, including
Sweden, Hong Kong, Germany, New Zealand, and Singapore, have examined this
option and explicitly ruled out a total ban on embedded commissions because
of concerns that it will create a potential advice gap.
Europe, through MiFID II, has proposed to prohibit independent advisors
from accepting commissions; however, the independent advice channel is one
of the smallest channels in the European funds industry, representing just
11% of assets. The vast majority of fund sales are made through banks,
where the MiFID II prohibition does not apply.
With respect to embedded commissions, only 13% of total worldwide mutual
fund assets of US$39.4 trillion are covered, or slated to be covered, by a
The information in this article is drawn from
Advice and the Modest Investor: A Canadian Perspective.
1. Investor Economics, Household Balance Sheet, 2015
2. Pollara, 2016
3. Investor Economics, Household Balance Sheet, 2015
4. Pollara, 2016
5. Cirano, 2016
6. Pollara, 2016
7. Cirano, 2016
8. MFDA Client Research Report: BULLETIN #0721 – C
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together 150 organizations, including fund managers, distributors and
industry service organizations, to foster a strong, stable investment
sector where investors can realize their financial goals. By connecting
Canada’s savers to Canada’s economy, our industry contributes
significantly to Canadian economic growth and job creation. The
organization is proud to have served Canada’s mutual fund industry and
its investors for more than 50 years.
Notes and disclaimer
Content © 2017 by the Investment Funds Institute of Canada.
All rights reserved. Reproduction in whole or in part without prior written
permission is prohibited. Used with permission.
The foregoing is for general information purposes only. This information is
not intended to provide specific personalized advice including, without
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funds are not guaranteed and are not covered by the Canada Deposit
Insurance Corporation or by any other government deposit insurer. There can
be no assurances that a fund will be able to maintain its net asset value
per security at a constant amount or that the full amount of your
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