I Did The Math On Your Investment Fees And The Results Weren’t Pretty

A few weeks ago I invited readers to share their portfolio details with me so I could help ‘do the math’ on their investment fees. Many of you did, and the results weren’t pretty. From accounts loaded with deferred sales charges (DSCs), management expense ratios (MERs) in the high 2 percent range, and funds overlapping the same sectors and regions, it was a predictable mess of over-priced products.

The worst of the bunch – the number of portfolios filled with segregated funds.

I’ve highlighted segregated funds as the biggest offender when it comes to fees for two reasons:

  1. The MER on segregated funds are higher than most mutual funds (which we know are already high enough). I looked at one portfolio that held a suite of segregated funds from Industrial Alliance called Ecoflex with MERs of 2.99, 3.26, and 3.29 percent;
  2. Segregated funds were exempt from CRM2 disclosure rules because they are considered insurance products. Investors receive the fund facts sheet which still express fees in percentage terms rather than breaking them down and disclosing in dollar terms.

Doing the math on your investment fees

Keep in mind most readers were looking for me to do the math on their investment fees for portfolios valued at $250,000 or more. One reader, a soon-to-be retiree, had an average MER of 3.13 percent for his $412,000 portfolio.

I told him he paid nearly $13,000 in investment fees last year and asked if he thought he was getting good value for his fees. He said he hadn’t met with his advisor in three years, despite repeated attempts to get together to discuss his retirement plan.

Another reader held $300,000 in high fee mutual funds with Investors Group. She recognized the fees, but was on the fence about switching because she was in the middle of the deferred sales charge schedule – a penalty that would cost her $10,000 if she sold the funds and transferred to a robo-advisor.

Not surprisingly, the big banks were also some of the biggest offenders for high investment fee portfolios. Despite offering a wide-range of in-house index mutual funds and ETFs, most bank advisors prefer to build portfolios with higher fee equity mutual funds (and even some bond funds in the 2 percent range for MER). That’s because those higher fee mutual funds are still considered to be ‘suitable’ for the investor while putting more money into the hands of the mutual fund manager and dealer.

The tyranny of fees

Why do I continue to harp on about investment fees? The most obvious reason is that Canadians are simply over paying for their investments and not getting the value back from their advisors in other ways; such as financial planning, goal setting, estate planning, tax strategies, and retirement planning.

The other reason is what Vanguard founder Jack Bogle calls the tyranny of fees:

“What happens in the fund business is that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact.”

In one example, Bogle explains that over a 50-year time horizon an investor paying 2 percent in fees annually can lose 63 percent of the potential returns in his or her portfolio.

Investors don’t notice because they don’t pay these expenses directly, but the fees will reduce the return on their investment. What starts out unassuming – 2 percent on $25,000 is only $500 per year after all – becomes a compounding machine as your investment portfolio grows. A $250,000 portfolio at 2 percent will reduce the investment return by $5,000. Annual returns on a $1M portfolio are reduced by $20,000.

Reducing those fees, even cutting them in half, can give a big boost to your investment portfolio over time.

What to look for in your investment statement

Investors should be receiving their annual investment statements at the end or middle of the calendar year, depending on the investment firm.

You should look for your personal rate of return, which measures not only how your funds performed but also how the timing and amount of your contributions and withdrawals affected your returns.

You’ll also want to know, in dollar terms, how much you paid directly to your financial firm for things like trading fees and account administration fees, plus how much you paid indirectly through trailing commissions.

For those invested in segregated funds and feeling left out, take heart. According to insurance regulators, by 2019 investors in segregated funds will have the entire amount revealed on their statement.

The Globe and Mail’s Clare O’Hara has a great explanation of what to look for in your annual statement, which you can read here or watch in the video below:

Final thoughts

I was happy to do the math on your investment fees and shine a light on the ugly side of your portfolios. Most Canadians are overpaying for their investment products – remember more than $1.4 trillion is invested in mutual funds with the vast majority in commission-based mutual funds. Not only does investment performance suffer, many investors are not getting value for their money when it comes to advice on other financial matters.

Thankfully, there are enough choices out there for the average investor to save on investment fees. A do-it-yourself approach with low cost ETFs will cut fees to the bone, but might be too difficult to manage for some people. For those in-between, consider a robo-advisor to help manage your investments online.

Weekend Reading: For Brock Hirsche Edition

Just over two years ago Brock Hirsche, the 23-year-old captain of the University of Lethbridge Pronghorns men’s hockey team, was diagnosed with testicular cancer. It’s a disease most commonly found in men aged 15-35 and one that hit the Pronghorn family hard as three members of the program were diagnosed with testicular cancer within the span of a year.

Brock battled hard through chemotherapy and radiation to become cancer-free later that year. Unfortunately the cancer came back in November 2017 and, after another round of aggressive treatment failed, Brock’s doctors gave him a grim prognosis: continue invasive chemo and radiation treatment with a slim chance of survival, or forgo further treatment and live out his remaining months as best he could. He chose the latter, with the goal of making it to his 27th birthday next February.

Brock has worked with the University of Lethbridge, along with close friends and family, to establish the Brock Hirsche Pronghorn Hockey Scholarship, an annual student award that will support a Pronghorn men’s hockey player who will be a leader in his community and preferably have some experience in promoting men’s health issues.

A leader who also captained his WHL Prince George Cougars, Brock continues to raise awareness for testicular cancer and encourages young men to get tested. He courageously spoke in front of 200 people last night at the ‘Horns Hockey Alumni Dinner in Lethbridge, an event that raised $15,000 for his scholarship fund.

For Brock Hirsche

I can’t think of a time when I’ve ever mixed my work life with my blog life, but I also can’t think of a better cause with which to share with all of you. I’m a fundraiser for Pronghorn Athletics at the University of Lethbridge and it will be my personal mission over the next few months to ensure this award reaches the $25,000 mark and beyond so that the fund can be endowed and Brock’s legacy can live on with an annual scholarship in his name.

If you have an extra $20, $200, or $2,000 that you’d like to put towards a good cause, I ask you to please consider donating to the Brock Hirsche Pronghorn Hockey Award at gohorns.ca/for-brock

The University of Lethbridge is a registered charity and donations to this scholarship fund will receive a tax-receipt for the full amount.

Thank you for allowing me to use this platform to bring awareness to a cause that is near and dear to my heart.

This Week’s Recap:

On Monday I shared some shocking research on the misguided beliefs of financial advisors.

On Wednesday Marie looked at the implications of waiting for an inheritance.

And on Friday Marie asked if ETFs are becoming too complex as more and more niche products flood the market.

Many thanks to Erica Alini at Global News for allowing me to share my thoughts on mortgage brokers in her excellent piece on the deal hunter’s guide to getting the lowest mortgage rate.

Weekend Reading:

A Wealth of Common Sense blogger Ben Carlson offers some perspective on investment advice.

Tom Bradley explains that 83 percent of funds held in discount brokerage accounts pay a trailer fee:

“As a reminder, trailers are meant to pay for on-going advice. Discount brokers aren’t licensed to provide advice to clients.”

See the problem?

John De Goey explains exactly how mutual fund fees work and how your advisor gets paid.

Ben Felix tackles the big business of index creation with this video on why not all index funds are created equal:

Here’s Dr. Networth blogging about his journey to passive index investing. In part two of the journey, the good doctor offers readers a chance to win a copy of Andrew Hallam’s Millionaire Teacher.

Speaking of the millionaire teacher, Andrew Hallam explains how a seven-year old investor beats Harvard’s endowment fund.

Costco shoppers rejoice! The wholesale giant announces plans for grocery home delivery in Canada.

Rising debts explained: Rob Carrick says mortgage plus daycare equals financial overload.

Rob McLister explains the one week’s salary rule: a time-honoured maxim representing one month’s mortgage payment.

MoneySense’s Bruce Sellery says income properties aren’t as simple of a money-making venture as you think:

Can you use a financial planner even if you’re not rich? Why you don’t have to have a ton of cash in order to hire someone to manage it.

Jason Heath says to watch out for OAS clawbacks if you plan on working in retirement.

Blogger Michael James with a thoughtful reflection on why he retired.

Solo retirement is on the rise — here’s how you can mitigate the risks.

Why a planned car loan doesn’t have Half Banked blogger Des Odjick pressing the panic button on her debt.

Morgan Housel explains why luck is the flip side of risk. You cannot understand one without appreciating the other.

Want to be happy? Try moving to Finland, number one in the 2018 world’s happiness report.

Finally, here’s all the things you’re doing wrong when you travel, according to Anthony Bourdain.

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