In Morningstar’s 2015 Global Fund Investor Experience Study, published in June, Canada scored a C+ based on four categories: Regulation and Taxation (C), Disclosure (A-), Fees and Expenses (D-), and Sales and Media (B). As usual, the category that stands out is Fees and Expenses. The average equity fund in Canada has a fee of 2.35%, while the average balanced fund has a fee of 2.16%. One of the most interesting parts of this study is the breakdown of fee-based vs. commission-based funds in Canada. Knowing that the majority of Canadian investment fund assets are in mutual funds, and the majority of mutual assets are commission-based, it begs the question of whether or not investment recommendations are affected by commissions. Low-cost investment products such as index mutual funds and ETFs do not pay deferred sales charge or trailing commissions.

Mutual funds can be obtained by investors in three forms: commission-based, fee-based, and direct.

A commission-based fund has a commission for the advisor selling it built into the MER; the net effect is that the fund company rather than the client is paying the advisor. These funds must have higher fees in order for them to pay the advisor, and cover the operating costs of the fund. If an advisor operates on a commission basis, they are likely to use funds that pay commission. A fee-based fund does not pay any commissions; the MER only covers the costs of the fund, and the advisor is left to negotiate a separate fee with the client. Direct funds are purchased without going through an advisor at all.

With such a large proportion of Canadian mutual fund assets in commission-based funds, it is hard to believe that commissions are not playing a role in investment recommendations.

Fund Type Commission-Based Fee-Based Direct
Domestic Core Balanced – Aggressive 95.6 4.1 0.3
Domestic Core Balanced – Moderate 93.5 4.1 2.4
Domestic Core Balanced – Conservative 96.5 3.2 0.3
Domestic Core Bonds 82.5 9.1 8.4
Domestic Core Equity 90.9 4.4 4.7
Domestic Money Market 90.3 2.4 7.3
Domestic Non-Core Bonds 86.1 11.3 2.6
Domestic Non-Core Equity 84.6 9.4 6.0
Foreign Core Equity 79.6 13.2 7.3
Foreign Money Market 96.4 0.3 3.3
Foreign Non-Core Equity 84.2 13.0 2.8
Global Core Balanced – Aggressive 96.2 2.7 1.1
Global Core Balanced – Moderate 95.8 3.5 0.8
Global Core Balanced – Conservative 94.1 5.8 0.1
Global Core Bonds 58.1 41.2 0.7
Global Core Equity 88.8 10.1 1.1
Global Non-Core Balanced 93.8 4.6 1.5
Global Non-Core Bonds 74.7 20.5 4.8
Global Non-Core Equity 83.7 12.2 4.1
Sector Equity 88.8 9.7 1.5
Source: Morningstar Global Investor Experience Study