Why pay your bank or advisor when they are not offering any advice?

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.

RBC Canadian Equity

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. Please, please, please share this post and help your fellow Canadians.

You can follow Cut The Crap Investing by way of that button at the very bottom of this page.

Questions to Dale cutthecrapinvesting@gmail.com or leave a message on this post.

8 thoughts

  1. Hi Dale, I’m wanting to open a trading account to transfer my tfsa from RBC (they’re charging me 1% to hold account and no advice). Please advise on which would be the best – I’m a rookie! Heard Qtrade or Questrade? Regards, Diane

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    1. Hi Diane. I like the folks at Questrade and I’ve had some readers tell me they had a very good experience in the transfer process and beyond. They do have free purchases on most ETFs. All said, I’d suggest you read the reviews here and there. I believe Rob Carrick does that every year in the Globe. I am considering a move to Questrade from TD Waterhouse. TD charges me a $35 fee if I want to take monies out of my RRSP account. to spend. I have to see what they can do about that.

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    2. Diane, what I like about Questrade are the ETFs that can be purchased with no trading fee. They charge a fee when you sell. And bonus the MER is so much lower than mutual funds. I also looked at Qtrade and even started to sign up with them but they wanted me to jump through all kinds of hoops. Qtrade has 100 ETFs that can be purchased with no fee, all the rest cost a trading fee $8.75 each time. If you’re like me and each paycheque you transfer money to trade and buy ETFs, even if it’s only one or two shares at a time, there’s no fee at Questrade even for small transactions. If the ETF you want to buy is one of those no fee to purchase at Qtrade, then either company won’t make a difference. Keep your eye out for someone who has an account at Questrade who can give you a sign up code and you’ll get $50 towards trading. Maybe Dale has a code you can use at sign up?

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      1. Thanks Cheryl for that feedback. Yes I am a big fan of Questrade. I do have an affiliate link somewhere on my site. I appreciate you thinking of me for that. Hopefully I have it set up correctly, ha. I don’t really promote my affiliate links and that money-making thing. Found it. Yes if you sign up after clicking on the first Questrade link in this article, my Questwealth review …

        https://cutthecrapinvesting.com/2019/01/08/questwealth-a-new-name-and-a-new-low-fee-robo-advisor-champion-in-canada/

        Thanks again, and let me know if you have any questions on your portfolio selection.

        Dale

        Liked by 1 person

  2. Are you still a financial advisor who can deal with mutual funds? I have limited options on a LIRA that holds 4 mutual funds through Manulife. The name of the type of investment I bought escapes me but it’s something like guaranteed income. When my financial advisor bought them, I’m guaranteed to always get the amount I invested in case something goes really bad with the markets, so they’re like my low risk investment. I liked that financial advisor, she was an independent business, but she closed up shop and moved to Mexico. I have a financial advisor at my credit union who I transferred the funds to but he’s not in good communication with me. Probably because he’s not going to make more money off me. I want to move them along again. One of the funds is lagging. Namely, Manulife C.I Harbour Growth & Income GIF. I can buy and sell from a limited amount of mutual funds within this Manulife guaranteed program. I can probably get an investor at Questrade who I could transfer that part of my portfolio over for me couldn’t I? In 2025 I’ll be able to start drawing from it. I can’t sell just that one fund and transfer those monies out to a LIRA at Questrade because – again the technical term escapes me – I can’t break up the set. If I do I cancel the whole guarantee thing. It’s all or nothing.

    Liked by 1 person

    1. Hi Cheryl, I am no longer licensed. This site is for ‘informational purposes’ 🙂 It sounds like you might have an index-linked GIC product but that’s just a guess. Send me the name of the investment in an email if you like and I can look into that. With your transfer prospects ask your Questrade representative for options and details and always pay attention to any fees that might be created by doing a transfer. IMHO you can certainly set up investments that are far superior to the funds offered at credit unions and Manulife. Again, I am happy to help or seek more help when I don’t know the answer(s). cutthecrapinvesting@gmail.com

      I know the Questrade folks will bend over backwards to help you.

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  3. Ya know, Dale you are doing a great job here educating people. Thats why I come here and learn from you and a lot of great comments section. Keep it up

    Liked by 1 person

    1. thanks ‘unbalanced’ that is very kind of you. Yes keep those comments coming. On Seeking Alpha where I write the comment section is usually quite robust. They can be a source or learning and personal insights that is greater than the actual articles.

      And of course keep spreading the word and send folks to this site and MoneySense, Canadian Couch Potato, myownadvisor, boomerandecho. milliondollarjourney, findependencehub the Robo Advisor blogs and more 🙂

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