Most Canadians go to their bank or a mutual fund sales office to access their investments. And most Canadians invest by way of those mutual funds that carry very high fees, in fact Canadians pay the highest fees in the developed world. That can eat into half of your investment returns over the decades.
Fees can come in many shapes and forms when it comes to mutual funds but I’ll outline the two main categories or destinations for those fees. The ‘total’ fee is know as the MER – the management expense ratio. Depending on what study or evaluation used you’ll see it offered that Canadians pay on average between 2.2% and 2.5% annual for that total MER. There is a trailing commission as a component of that MER. That trailing commission goes to the dealership – typically the advisor who sold you that mutual fund. The other portion goes to the company that creates and manages that mutual fund.
The trailing commission for a stock fund is usually 1%. That trailing commission goes to pay for the advice offered. But if you go to a bank for your investments it’s highly unlikely that you will be offered any advice of any sort. The mutual fund sales representative simply does not have the training, knowledge (accreditation) or inclination to offer any real advice. There is no detailed financial planning. And sadly there is often or mostly very little understanding of basic investments, investment principles and even mutual funds. Across the desk from you is a salesperson.
You’re paying 1% for advice that you don’t receive.
Most of these ‘advisors’ will need to get a passing grade of just 60% on their exam to get their license to sell mutual funds. They have little interest or incentive to expand their knowledge. They are not allowed to put that knowledge to work. They simply sell the book. In fact my friends who have unfortunately held those sales positions have continually told me that if they were to offer any lower fee products that might be hiding on the shelf – they’re actions would be quickly addressed or they would be shown the door.
I’ve trained many advisors who come by way of the big banks. They tell me the same story over and over again. And they almost exclusively come into training with very little understanding of the investment basics. Credit unions are no different. The ones I’ve looked at don’t even have sensible low fee investments on the shelf – just mutual funds with high fees.
You’re paying even more for investment managers who don’t do their job.
The larger portion of the mutual fund fees goes to the creation and management of the investment. On a fund with a 2.2% MER we would see 1% go to the dealership (advisor) and 1.2% would go to the investment fund manager. As you may know that 1.2% or more is also not money well spent. The actual investments usually and largely under-perform the passive market benchmarks.
So far we have a lose-lose proposition with mutual funds.
And many of the fund managers don’t even attempt to beat the market. They simply go out and buy the market and for that they will charge you a large fee. Regulators are ‘on to that’. There are also class action lawsuits. Please have a read of this article from Clare O’Hara of The Globe and Mail RBC, TD threatened with lawsuit over “closet indexers”.
The mutual funds in question essentially hold the same companies as the Canadian stock market index that you can purchase with an Exchange Traded Fund with fees in the area of .05%.
Here are the top holdings for the RBC Canadian Equity Fund.
Those are the top holdings in the market index ETF, ticker XIC from iShares that you can purchase for .05%. Yes RBC did also sneak in slight exposure to one of their high fee funds.
And here’s how I would often frame the proposition for investors …
Do you want to pay 2% or more to own the big Canadian banks, Suncor, Enbridge, TransCanada, Canadian National Railway and Manulife, or do you want to pay .05% to own those same companies?
And in a nut shell that is the difference between high-cost active investing and low fee index investing. In the large cap space they mostly hold a lot of the same stuff, it just comes down to fees.
How to move to lower fee investments.
There are many simple managed portfolio solutions. You can get advice and lower fee portfolios with the Canadian Robo Advisors. You can seek the advice of a fee-for-service advisor and then access complete One Ticket Asset Allocation Funds or create your own ETF Portfolio.
The key is cutting your fees. It does not make sense to pay for advice you do not receive from your bank or mutual fund sales firm. It does not make sense to pay managers to under perform.
Thanks for reading.
Questions to Dale firstname.lastname@example.org or leave a comment on this post.