Low-MER investing picks up steam

By Steven Lamb | May 7, 2004 | Last updated on May 7, 2004
3 min read

R elated Stories
  • Investors paying closer attention to fund fees, Maclean’s finds
  • F-class funds more popular with brokers than independent advisors
  • The price they pay (from the June 2003 edition of Advisor’s Edge)
  • Independence daze (from the September 2003 edition of Advisor’s Edge)

    • In keeping with its cost-minimization credo, Dimensional has opted to only deal with fee-for-service advisors. Steiman says clients are slowly coming around to the idea of paying for advice and those advisors holding onto transaction-based compensation are fighting a losing battle, as the worldwide trend moves toward fee-only compensation.

    He points out that if the best advice is to do nothing, transaction-based compensation leaves the ethical advisor unrewarded for their advice. Fee-for-service advisors are rewarded for their advice while encouraging clients to hold investments over the long-term.

    As clients continue to push for lower fund fees, advisors must move to a compensation structure that values their advice and relies less on shrinking trailer fees.

    “People don’t come to us just because we’re cheap. There are cheap alternatives as well, like ETFs,” Steiman says. “They come to us because of the philosophy and the fact that it’s priced reasonably.”

    The company’s F class funds carry MERs ranging from 0.25% for its Five-Year Global Fixed Bond Fund, to 0.50% for the International Small Cap Fund. MERs rise by 1% for A-class fund units &#151 topping out at 1.50%.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (05/07/04)

    Steven Lamb

    (May 7, 2004) Whether clients are blaming their advisors or not, it appears low-fee investing continues to pick up steam in Canada, as investors seek alternatives to the traditional actively managed mutual fund, including exchange-traded funds (ETFs) and index funds.

    If clients are growing reluctant to pay for professional active fund management, it’s with good reason, according to the people at Santa Monica, Calif.-based Dimensional Fund Advisors.

    “There’s no question ETFs are better than active management,” says Brad Steiman, regional director for Dimensional in Canada. “But instead of being handcuffed by tracking benchmarks, you can still have a low-cost passive strategy that adds value on the margin. We think we have a solution that’s even more effective than just an index.”

    Dimensional has been active in Canada for a while, but only launched its retail funds in October 2003. In the ensuing seven months, Dimensional has gathered assets of $140 million on the retail side, with about $1.2 billion from institutional and ultra high net worth clients.

    The firm’s philosophy is based in the Efficient Markets Theory of University of Chicago professors Eugene Fama and Kenneth French. Essentially their theory held that any given time, individual stocks are priced “correctly” based on the available information.

    Since corporate information is acted upon so quickly, it is impractical to act on news as it breaks. Any attempt to beat the market is speculation, not investing. The only news that can provide an “inside edge” must be just that — insider information.

    Dimensional’s approach seems simple enough: buy every company and hold it. This buy-and-hold strategy reduces costs associated with active trading, saving more capital for the investor.

    The portfolio approach is a little more complex than that, as Dimensional drops certain stocks that do not fit into a given portfolio’s target asset class — for instance, excluding U.S.-listed foreign stocks like Nokia from its U.S. large cap portfolio.

    This still leaves an eligible universe of over 3,500 separate stocks in the U.S. small cap fund and nearly 1,500 in the U.S. value fund. Dimensional holds that such broad market diversification is the best way to minimize overall portfolio risk.

    “Part of the equation is always minimizing costs, that’s a big component of an investor’s return. I think the philosophy and the fees go hand in hand,” Steiman says. “We bring the perspective that even though you can’t add value through stock picking, market timing and traditional forms of active management, there are some things you can do that adds some value on the margin.”

    R elated Stories
  • Investors paying closer attention to fund fees, Maclean’s finds
  • F-class funds more popular with brokers than independent advisors
  • The price they pay (from the June 2003 edition of Advisor’s Edge)
  • Independence daze (from the September 2003 edition of Advisor’s Edge)

    • In keeping with its cost-minimization credo, Dimensional has opted to only deal with fee-for-service advisors. Steiman says clients are slowly coming around to the idea of paying for advice and those advisors holding onto transaction-based compensation are fighting a losing battle, as the worldwide trend moves toward fee-only compensation.

    He points out that if the best advice is to do nothing, transaction-based compensation leaves the ethical advisor unrewarded for their advice. Fee-for-service advisors are rewarded for their advice while encouraging clients to hold investments over the long-term.

    As clients continue to push for lower fund fees, advisors must move to a compensation structure that values their advice and relies less on shrinking trailer fees.

    “People don’t come to us just because we’re cheap. There are cheap alternatives as well, like ETFs,” Steiman says. “They come to us because of the philosophy and the fact that it’s priced reasonably.”

    The company’s F class funds carry MERs ranging from 0.25% for its Five-Year Global Fixed Bond Fund, to 0.50% for the International Small Cap Fund. MERs rise by 1% for A-class fund units &#151 topping out at 1.50%.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (05/07/04)

    (May 7, 2004) Whether clients are blaming their advisors or not, it appears low-fee investing continues to pick up steam in Canada, as investors seek alternatives to the traditional actively managed mutual fund, including exchange-traded funds (ETFs) and index funds.

    If clients are growing reluctant to pay for professional active fund management, it’s with good reason, according to the people at Santa Monica, Calif.-based Dimensional Fund Advisors.

    “There’s no question ETFs are better than active management,” says Brad Steiman, regional director for Dimensional in Canada. “But instead of being handcuffed by tracking benchmarks, you can still have a low-cost passive strategy that adds value on the margin. We think we have a solution that’s even more effective than just an index.”

    Dimensional has been active in Canada for a while, but only launched its retail funds in October 2003. In the ensuing seven months, Dimensional has gathered assets of $140 million on the retail side, with about $1.2 billion from institutional and ultra high net worth clients.

    The firm’s philosophy is based in the Efficient Markets Theory of University of Chicago professors Eugene Fama and Kenneth French. Essentially their theory held that any given time, individual stocks are priced “correctly” based on the available information.

    Since corporate information is acted upon so quickly, it is impractical to act on news as it breaks. Any attempt to beat the market is speculation, not investing. The only news that can provide an “inside edge” must be just that — insider information.

    Dimensional’s approach seems simple enough: buy every company and hold it. This buy-and-hold strategy reduces costs associated with active trading, saving more capital for the investor.

    The portfolio approach is a little more complex than that, as Dimensional drops certain stocks that do not fit into a given portfolio’s target asset class — for instance, excluding U.S.-listed foreign stocks like Nokia from its U.S. large cap portfolio.

    This still leaves an eligible universe of over 3,500 separate stocks in the U.S. small cap fund and nearly 1,500 in the U.S. value fund. Dimensional holds that such broad market diversification is the best way to minimize overall portfolio risk.

    “Part of the equation is always minimizing costs, that’s a big component of an investor’s return. I think the philosophy and the fees go hand in hand,” Steiman says. “We bring the perspective that even though you can’t add value through stock picking, market timing and traditional forms of active management, there are some things you can do that adds some value on the margin.”

    R elated Stories
  • Investors paying closer attention to fund fees, Maclean’s finds
  • F-class funds more popular with brokers than independent advisors
  • The price they pay (from the June 2003 edition of Advisor’s Edge)
  • Independence daze (from the September 2003 edition of Advisor’s Edge)

    • In keeping with its cost-minimization credo, Dimensional has opted to only deal with fee-for-service advisors. Steiman says clients are slowly coming around to the idea of paying for advice and those advisors holding onto transaction-based compensation are fighting a losing battle, as the worldwide trend moves toward fee-only compensation.

    He points out that if the best advice is to do nothing, transaction-based compensation leaves the ethical advisor unrewarded for their advice. Fee-for-service advisors are rewarded for their advice while encouraging clients to hold investments over the long-term.

    As clients continue to push for lower fund fees, advisors must move to a compensation structure that values their advice and relies less on shrinking trailer fees.

    “People don’t come to us just because we’re cheap. There are cheap alternatives as well, like ETFs,” Steiman says. “They come to us because of the philosophy and the fact that it’s priced reasonably.”

    The company’s F class funds carry MERs ranging from 0.25% for its Five-Year Global Fixed Bond Fund, to 0.50% for the International Small Cap Fund. MERs rise by 1% for A-class fund units &#151 topping out at 1.50%.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (05/07/04)

    (May 7, 2004) Whether clients are blaming their advisors or not, it appears low-fee investing continues to pick up steam in Canada, as investors seek alternatives to the traditional actively managed mutual fund, including exchange-traded funds (ETFs) and index funds.

    If clients are growing reluctant to pay for professional active fund management, it’s with good reason, according to the people at Santa Monica, Calif.-based Dimensional Fund Advisors.

    “There’s no question ETFs are better than active management,” says Brad Steiman, regional director for Dimensional in Canada. “But instead of being handcuffed by tracking benchmarks, you can still have a low-cost passive strategy that adds value on the margin. We think we have a solution that’s even more effective than just an index.”

    Dimensional has been active in Canada for a while, but only launched its retail funds in October 2003. In the ensuing seven months, Dimensional has gathered assets of $140 million on the retail side, with about $1.2 billion from institutional and ultra high net worth clients.

    The firm’s philosophy is based in the Efficient Markets Theory of University of Chicago professors Eugene Fama and Kenneth French. Essentially their theory held that any given time, individual stocks are priced “correctly” based on the available information.

    Since corporate information is acted upon so quickly, it is impractical to act on news as it breaks. Any attempt to beat the market is speculation, not investing. The only news that can provide an “inside edge” must be just that — insider information.

    Dimensional’s approach seems simple enough: buy every company and hold it. This buy-and-hold strategy reduces costs associated with active trading, saving more capital for the investor.

    The portfolio approach is a little more complex than that, as Dimensional drops certain stocks that do not fit into a given portfolio’s target asset class — for instance, excluding U.S.-listed foreign stocks like Nokia from its U.S. large cap portfolio.

    This still leaves an eligible universe of over 3,500 separate stocks in the U.S. small cap fund and nearly 1,500 in the U.S. value fund. Dimensional holds that such broad market diversification is the best way to minimize overall portfolio risk.

    “Part of the equation is always minimizing costs, that’s a big component of an investor’s return. I think the philosophy and the fees go hand in hand,” Steiman says. “We bring the perspective that even though you can’t add value through stock picking, market timing and traditional forms of active management, there are some things you can do that adds some value on the margin.”

    R elated Stories
  • Investors paying closer attention to fund fees, Maclean’s finds
  • F-class funds more popular with brokers than independent advisors
  • The price they pay (from the June 2003 edition of Advisor’s Edge)
  • Independence daze (from the September 2003 edition of Advisor’s Edge)

    • In keeping with its cost-minimization credo, Dimensional has opted to only deal with fee-for-service advisors. Steiman says clients are slowly coming around to the idea of paying for advice and those advisors holding onto transaction-based compensation are fighting a losing battle, as the worldwide trend moves toward fee-only compensation.

    He points out that if the best advice is to do nothing, transaction-based compensation leaves the ethical advisor unrewarded for their advice. Fee-for-service advisors are rewarded for their advice while encouraging clients to hold investments over the long-term.

    As clients continue to push for lower fund fees, advisors must move to a compensation structure that values their advice and relies less on shrinking trailer fees.

    “People don’t come to us just because we’re cheap. There are cheap alternatives as well, like ETFs,” Steiman says. “They come to us because of the philosophy and the fact that it’s priced reasonably.”

    The company’s F class funds carry MERs ranging from 0.25% for its Five-Year Global Fixed Bond Fund, to 0.50% for the International Small Cap Fund. MERs rise by 1% for A-class fund units &#151 topping out at 1.50%.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (05/07/04)