Why Canadians Aren't Flocking to ETFs | Common Sense Investing with Ben Felix

TL;DR

Canadians have been slow to adopt index funds due to banks incentivizing their financial advisors to sell actively managed funds with higher fees, commission-based compensation models for independent advisors, lack of a fiduciary requirement for Canadian advisors, and the historical lack of fee and performance disclosure rules.

Transcript

At the end of 2016, 11.3% of Canadians’ investment fund assets were invested in index funds and similar passively managed products. Our neighbours in the United States are ahead of us, with 34% of their investment fund assets invested this way. In 2016, Canadians added $10.9 billion to passive funds, and $10 billion to actively managed funds... Pre... Read More

Key Insights

• 🥺 Canadian banks prioritize selling actively managed funds with higher fees, leading to less promotion and training for index funds.
• ✋ Independent financial advisors in Canada still largely operate on a commission-based compensation model, creating incentives to sell high-fee mutual funds.
• 👻 The lack of a fiduciary requirement for Canadian advisors allows them to recommend high-fee funds that may not be in the best interest of the client.
• 🖤 Historically, fee and performance disclosure rules in Canada were lacking, leaving investors unaware of the true costs and performance of their investments.
• 🇺🇸 The United States has seen significant growth in Registered Investment Advisors who act as fiduciaries, while Canadian advisors do not have the same requirement.
• 🤑 Canadian investors have not been pulling money out of actively managed funds and moving it into index funds at the same pace as their American counterparts.
• 🫰 The combination of financial incentives, compensation structure, regulatory environment, and disclosure rules has contributed to the slower adoption of index funds in Canada.

Questions & Answers

Q: Why have Canadians been slow to adopt index funds?

Canadians have been slow to adopt index funds due to banks incentivizing their advisors to sell actively managed funds with higher fees.

Q: What is the compensation model for independent financial advisors in Canada?

Independent advisors in Canada have historically been paid by commission associated with selling high-fee mutual funds.

Q: How is the regulatory environment different in the United States and Canada?

Registered Investment Advisors in the United States have a fiduciary requirement to act in the best interest of their clients, while Canadian advisors operate under a "suitability requirement."

Q: Why have Canadian investors been unaware of the fees and performance of their investments?

Until recently, fee and performance disclosure rules in Canada were lacking, leaving investors in the dark about the fees they were paying and the performance of their investments.

Summary & Key Takeaways

• Canadians have only invested 11.3% of their investment fund assets in index funds, compared to 34% in the United States.

• Canadian banks train and incentivize their financial advisors to sell actively managed funds, which are more profitable for the banks.

• Independent financial advisors in Canada still largely operate on a commission-based compensation model, with high-fee mutual funds that pay commissions.

• Canadian financial advisors do not have a fiduciary requirement and only need to recommend "suitable" investments based on their client's situation.

• Until recently, fee and performance disclosure rules in Canada were lacking, leaving investors unaware of the fees they were paying and the performance of their investments.