Yes, You Can Retire Up To 30% Wealthier

Questrade touched a nerve with financial advisors with a series of commercials highlighting how lower investment fees over time potentially means you can retire up to 30% wealthier. Financial advisor extraordinaire Jason Pereira acknowledged that Questrade was right to go after do-nothing advisors who collect fat commissions, but he claimed the 30% wealthier promise was unrealistic and borderline illegal.

Mr. Pereira’s argument is a good one. Advisors like him (and others who put a client’s best interests ahead of their own) can add tremendous value for clients, but not in the way you might think.

The old school notion of a financial advisor is of someone who adds value through their stock-picking prowess. But that argument falls flat when you see the evidence that the vast majority of actively managed funds fail to beat their benchmarks.

Indeed, investors are better off buying the entire market as cheaply as possible using index funds or ETFs.

PWL Capital’s Ben Felix once told me, “investing has been solved.” “The way for advisors to add value is on planning, behaviour, and transformation.” With that in mind, I can get behind the idea that financial advisors with this mindset do have a net positive impact for their clients, even after fees.

Which brings me to the point of this article. Canadians have $1.6 trillion invested in mutual funds, most of which are of the expensive, actively managed variety. Those actively managed funds aren’t adding value – the vast majority will underperform their benchmark. Furthermore, most bank-advised clients aren’t getting value in other ways – financial planning, goal setting and prioritization, behavioural coaching, etc.

Traditional advisors are still selling (and charging for) investment expertise, but failing miserably at delivering excess returns while offering little-to-no value for things that would truly make a difference for their clients.

The easy answer is to pair a fee-only advisor with a low-cost investment solution (either a self-directed portfolio of globally diversified ETFs, or through an automated portfolio with a robo advisor). This way, you get the planning, coaching, and behavioural nudges you need to succeed financially, plus the benefit of lowering your investment fees. Win-win.

But the sad reality is that financial inertia is powerful and it’s easier to keep your investments at your bank, along with your chequing, savings, and mortgage. I get it.

Retire up to 30% wealthier without moving your investments

What if I told you that you can still retire up to 30% wealthier without moving your investments to a robo advisor or a DIY investment solution? The answer is sitting right there on the product shelf at your bank – yet rarely if ever talked about by your financial advisor.

I’m talking about index funds. That’s right. Every big bank has a suite of index mutual funds available to investors. These funds charge between one-sixth to one-half the cost of the actively managed mutual funds that are typically sold to Canadian investors.

I’ve monitored and tracked the performance of big bank index funds and their actively managed mutual fund cousins for more than 10 years, and in every single case (when comparing to identical benchmarks), the lower cost index funds outperform the active funds.

So, all you need to do is walk into your bank branch, sit down with your advisor, and ask (no, demand) to move your portfolio from actively managed mutual funds to their index fund equivalents.

Below, I’ll show you the exact index funds to buy to build a 60/40 balanced, globally diversified portfolio of index funds at each of Canada’s five big banks. I’ll compare those index funds to the commonly sold actively managed “balanced” mutual fund.

RBC Index Funds

If you’re an RBC client, chances are you have the RBC Balanced Fund (RBF272) in your investment portfolio. The fund has nearly $5 billion in assets under management and comes with a fee (MER) of 2.16%. Returns have been decent, with a 10-year average annual return of 5.3%.

Here’s how to replicate that portfolio using RBC index funds:

Fund name	Allocation	Fund code	MER	10-yr return
RBC Canadian Index Fund	20%	RBF556	0.66%	5.6%
RBC U.S. Index Fund	20%	RBF557	0.66%	15.6%
RBC International Index Fund	20%	RBF559	0.61%	6.4%
RBC Canadian Bond Index Fund*	40%	RBF700	0.70%	3.8%

*Update: You may need to substitute the RBC Canadian Bond Index Fund (RBF700) for the RBC Canadian Government Bond Index Fund (RBF563)

The balanced portfolio of RBC index funds come with a weighted-average MER of just 0.67%. That’s one-third the cost of the RBC Balanced Fund.

The index fund portfolio’s annual returns over the past 10 years would have been 7.04%. Your projected portfolio could potentially be worth $769,809 after 30 years, assuming a starting investment of $100,000.

If you extrapolate the RBC Balanced Fund’s returns over 30 years, your portfolio would be worth $470,815.

A quick word about comparing apples-to-apples: The RBC Balanced Fund is more heavily tilted to Canadian stocks (33%), while holding less U.S. (13%) and International (15%) stocks. Since U.S. equities have outperformed Canadian equities over the past decade, it stands to reason that our index fund portfolio with a 20% allocation to U.S. stocks would outperform.

That said, even if we reduced the expected annual return of the index fund portfolio from 7.04% to 6%, your $100,000 would grow to $574,349 over 30 years. That’s 22% more wealth for your retirement.

TD Index Funds

TD’s e-Series funds are likely the most popular set of bank index funds on the market. But don’t think your TD advisor will tell you anything about them. The e-Series funds are notoriously difficult to buy – and you might just be better off buying them online.

But there’s $8.8 billion invested in TD’s Comfort Balanced Portfolio (TDB886) – a 50/50 balanced fund that comes with a MER of 1.92%. Its 10-year annual rate of return is 5.19%.

Let’s see how that compares to a portfolio of e-Series funds:

Fund name	Allocation	Fund code	MER	10-yr return
TD Canadian Index Fund e-Series	20%	TDB900	0.32%	6.0%
TD U.S. Index Fund e-Series	20%	TDB902	0.34%	16.2%
TD International Index Fund e-Series	20%	TDB911	0.49%	8.1%
TD Canadian Bond Index Fund e-Series	40%	TDB909	0.51%	4.1%

 

The 60/40 balanced portfolio of TD e-Series index funds comes with a weighted-average MER of just 0.43%. That’s less than one-quarter the cost of the TD Comfort Balanced Portfolio.

The returns are better for e-Series funds, too, at 7.7% per year over 10 years. Projected over 30 years and your portfolio could be worth $925,701.

Compare that to the TD Comfort Balanced Portfolio, where $100,000 turns into $456,282 after 30 years. That’s less than half the balance of the projected e-Series portfolio.

Again, let’s reduce the expected returns to 6% per year. Over a 30-year period, our $100,000 TD e-Series balanced portfolio would grow to $574,349. That’s nearly 26% more wealth for your retirement.

Scotia Index Funds

The Scotia Canadian Balanced Fund (BNS378) has $2.1 billion in assets and comes with a MER of 1.98%. While it positions itself as a Canadian fund, its mandate says up to 49% of the fund’s assets may be invested in foreign securities, making it a good proxy for a global balanced portfolio. Scotia’s Canadian Balanced Fund has a 10-year annualized return of 5.3%.

Scotia quietly has a decent portfolio of index funds to choose from, and so you’ll see below a 60/40 portfolio made up of four Scotia index funds. Note, I’m using the ‘A’ series funds but there are also ‘D’ series funds available for self-directed investors that comes with slightly lower MERs.

Fund name	Allocation	Fund code	MER	10-yr return
Scotia Canadian Index Fund	20%	BNS381	1.00%	5.3%
Scotia U.S. Index Fund	20%	BNS382	1.07%	15.2%
Scotia International Index Fund	20%	BNS387	1.26%	6.7%
Scotia Canadian Bond Index Fund	40%	BNS386	0.85%	3.8%

 

This portfolio of Scotia index funds comes with a weighted-average MER of 1.01%, which is about half the cost of the Scotia Canadian Balanced Fund.

The index funds would have also returned 6.96% per year for the past 10 years. Projected over 30 years and a $100,000 starting portfolio could be worth $752,734.

Compare that to the Scotia Canadian Balanced Fund, which projected over 30 years would be worth $470,816. That’s nearly 60% more for the index fund portfolio.

If we reduce the index fund returns to 6% per year then we know we’ll end up with $574,349 after 30 years. That’s still 22% more wealth for your retirement with the index funds.

BMO Index Funds

BMO has a ton of mutual funds to choose from, but I decided to use the BMO Asset Allocation Fund (BMO70145) and compare it to a suite of index funds.

The BMO Asset Allocation Fund has $1.4 billion in assets under management and comes with a MER of 2.12%. It charges this fee despite its underlying holdings being comprised of – get this – low cost BMO index ETFs. I mean, c’mon!

The fund’s asset mix is approximately 55% stocks and 45% bonds. It has returned 4.76% per year over the last 10 years.

As for BMO index funds, they’re actually listed in name as ETFs but are available on the mutual fund side of the house. Here’s a balanced portfolio of BMO index fund (ETFs):

Fund name	Allocation	Fund code	MER	10-yr return
BMO Canadian Equity ETF Fund	20%	BMO144	0.93%	5.1%
BMO U.S. Equity ETF Fund	20%	BMO722	1.00%	11.8%
BMO International Equity ETF Fund	20%	BMO727	1.05%	5.9%
BMO Core Bond Fund	40%	BMO160	1.16%	3.6%*

*since inception Nov 2014

The portfolio of BMO index funds comes with a weighted-average MER of 1.06% – exactly half the cost of BMO’s Asset Allocation Fund.

The index fund balanced portfolio would have 10-year annualized returns of 6%. Extrapolated over 30 years and a $100,000 portfolio would be worth $574,349.

Compare that to the more expensive BMO Asset Allocation Fund, which would only be worth $403,520 after 30 years.

That’s 42% more wealth after 30 years for the portfolio of BMO index funds.

CIBC Index Funds

CIBC’s flagship balanced fund is the CIBC Managed Balanced Portfolio (CIB834). This fund is a 50/50 portfolio with $2.9 billion in assets under management. It comes with a MER of 2.25% and has annual returns of 5.9% over the last 10 years.

CIBC has a surprisingly broad set of index funds, including relatively new “passive portfolios” which are like all-in-one asset allocation ETFs and track global markets using index funds.

These one-ticket solutions only go back two years, and the MER is relatively high at 1.33%, so instead we’ll focus on using individual index funds for each market to build our balanced portfolio.

Fund name	Allocation	Fund code	MER	10-yr return
CIBC Canadian Index Fund	20%	CIB300	1.14%	5.2%
CIBC U.S. Index Fund	20%	CIB500	1.18%	15.1%
CIBC International Index Fund	20%	CIB510	1.25%	7.2%
CIBC Canadian Bond Index Fund	40%	CIB503	1.16%	3.6%

 

This portfolio of CIBC index funds comes with a weighted-average MER of 1.18%, so just less than half the cost of the CIBC Managed Balanced Portfolio.

When it comes to returns, this index fund portfolio would have delivered 10-year annual returns of 6.94% – a full percent higher than the actively managed fund portfolio.

That means the expected balance of a $100,000 portfolio of CIBC index funds after 30 years would be $748,523 compared to the CIBC Managed Balance Portfolio which would have $558,314 after 30 years. That’s 34% more wealth for the CIBC index fund investor’s retirement.

Final Takeaway

It’s no surprise (to me, anyway) that the lower the cost of the index fund portfolio, the higher the outperformance.

Costs matter when it comes to investing. But that doesn’t mean you need to ditch your advisor and move to a self-directed portfolio of ETFs, or even move to a robo advisor, to lower your fees and achieve a better long-term outcome. I mean, if you have the time, skill, and temperament to do so then I say go for it.

But for the vast majority of investors who just want someone else to manage their portfolio, but who are also fee-conscious and don’t want to get ripped off, understand that a lower cost solution is available at your bank. 

Indeed, print off this article, or write down the names and fund codes of the index funds I highlighted for your given bank above, hand them to your bank advisor and ask – no, insist – on moving your portfolio from the expensive actively managed mutual funds to a portfolio of index funds.

And, if you find the financial advice lacking in terms of helping you prioritize goals, plan for retirement, and coach your behaviour, then perhaps it’s time to find a fee-only advisor who will look out for your best interests.

Do this and with enough time you will retire up to 30% wealthier than you would have if you stayed in those expensive and underperforming mutual funds. You can take that to the bank.