Yup, that was one of my ‘lines’ when I was an Advisor with Tangerine Investments. And it was not so much of a line as the honest truth as to why I was reaching out to clients who still owned the legacy, traditional high fee mutual funds that Tangerine originally offered. When Tangerine launched their mutual fund business a couple of decades ago, they offered the funds of the day – traditional actively managed mutual funds from the likes of AGF, Mackenzie, Fidelity and CI.
Recognizing the benefits and advantages on index investing Tangerine (then ING Direct) introduced their index-based mutual funds, then called the aptly-named Streetwise Portfolios. As a point of interest, I worked at ING’s advertising agency of the day, GWP Brand Engineering. While I worked more exclusively on ING Direct US, I was brought in to consult on the Streetwise Portfolio launch as I was the investing nut within the agency, and likely the only employee who knew what an index was and who actually owned an ETF. It was a full circle exercise for me to work on the birth of a fund product and to then become an advisor and trainer on that same product.
When the Tangerine Portfolios were launched in January of 2008 clients were certainly made aware of the lower fee option, and the much simpler and well-balanced approach to investing and portfolio creation. Many clients made the move to the Tangerine Portfolios but a considerable book of business remained in those higher fee mutual funds. So it was my ‘job’ at times to reach out to clients and invite them to lower their fees by half or more. The MER on the Tangerine Portfolio is 1.07%. The blended MER on the traditional actively managed fund baskets was usually in the area of 2.2% – 2.5%.
“We’d like to make less money off of you today.”
I don’t remember the first time that I offered that disruptive and cheeky suggestion. It likely came naturally out of conversation and in explaining why the heck I was calling and ‘bugging’ them to talk about investing – a subject that garners very little interest from Canadians. I’m sure I put my advertising training and thinking cap on. I love irony and surprise. That’s what often makes for a great attention-getting ad. But the thought or phrasing struck a chord with clients. They were shocked. They could not believe that a bank, even one that is known for disrupting and changing the banking industry with a focus on no-fee banking, was looking to switch a client to a lower fee investment offering. The client would pay less in fees, and potentially earn more, the bank would earn less. As you may know Tangerine as the dealership would earn a 1% trailing commission as they sold the funds to the client. Tangerine Investments would not have to do much or anything to earn that 1%. The total MER on the Tangerine Portfolios is 1.07%, the trailing commission is .40%. The remainder of the 1.07% goes to manage the fund, and to cover the taxes – HST at .13%. Yes, it’s Canada, that MER is taxed.
But of course, more important than Tangerine making less was the client paying less, much less. Fees were cut by 50%-60% or more. Keep in mind that there is also the TER or trading expense ratio for mutual funds. They are typically quite high for actively managed funds, and TER is not reported in the MER as the trading fees are not known in advance. They are reported after year-end and reported in the fund fact sheets. It’s typical to see a TER in the .10% area for an actively managed fund compared to .01% for a passive index based fund. That active management brings additional trading costs.
It’s about the returns, or lack of them.
Of course, it’s not just about the fees, it’s about the performance. And those generous returns were missing with the high fee mutual funds, almost exclusively across the board. And it was easy to do a comparison to show a client that they would have made considerably more in the lower fee funds.
You can also do your own comparisons by simply looking at the returns from the fund fact sheets or you can use this mutual fund comparison tool. Here’s an example comparing the Balanced Growth Portfolio to an AGF Elements portfolio with an MER of 2.40%.
The drastic under performance of high fee mutual funds is the norm, and the reason for why this site exists. But don’t guess, discover the cold hard numbers. Find out how much you’re losing to fees every year and over the decades. Many of the Canadian Robo Advisors are happy to do a portfolio analysis for free and with no obligation.
Is your bank calling you to switch your investments?
We now know that there are better ways to invest compared to traditional high fee actively managed funds. As Larry Bates, the author of Beat The Bank describes, those high fees are wealth destroyers. Please have a read of Don’t Give Away Half Of Your Investments – Beat The Bank.
Larry also describes the setting as Old Bay Street and New Bay Street. There’s the old way, and now there’s a better way. Your bank knows there’s a better way for you to invest. If you have an advisor at one of the mutual fund sales arms, he or she should know there’s a better way to invest.
Putting clients first is the right thing to do. In fact the low fee indexing industry has its roots in putting the client first. Vanguard, the ETF pioneer, is a not-for-profit operation.
Don’t wait for the call. Take things into your own hands.
Again, there are the Robo Advisors. You may create your own ETF Portfolio. There are a few companies such as Tangerine and Steadyhand that offer advice and more reasonable fee structures. You may break free from your advisor that is paid by the mutual funds and move to an advice-only planner. They offer conflict-free advice and planning.
And we should give credit to the folks at BMO who do more for low fee ETF investing in Canada compared to any of the other banks (perhaps all of them combined). In addition to the ETF suite there’s also their Robo SmartFolio offering and their one ticket asset allocation portfolios.
If you’re at TD ask about their e-series funds. And if you want to stay with your bank, they all have index-based products. Here’s Easy Index Mutual Fund Portfolios With The Big Banks courtesy of Million Dollar Journey. They like to hide these products. You may have to call your bank and offer …
“Hey, guess what, you’re going to make less money off of me moving forward”.
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Contact me, Dale @ firstname.lastname@example.org or better yet, leave a message or comment on this post.