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

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.

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  1. Loonie Doctor on March 19, 2018 at 8:03 am

    Wow! It is amazing how insidious fees are and they one of the few things an investor can actually control if they pay attention. Doctors and other high income earners are not immune to the problem either. Mutual funds are the worst offenders, but there is also variability in the financial advice quality with other payment models. A larger portfolio just means a larger dollar impact. The upside is that paying attention to the fees and acting accordingly can pay more than anything else that you do in your job – even if you are a highly paid specialist doc.

  2. TARIQ on March 19, 2018 at 10:23 am

    when we make money on investments the bank gives T5 or a paper that shows how much you made and copy goes to CRA too. If we lose money on investment can we ask CRA to compensate for our losses or NO.

  3. Mike on March 19, 2018 at 12:35 pm

    I’m okay with paying my advisor 1%, so far I net 1% a month in returns so well worth the money,I see that quite a few investors do it themselves and earn around 7% through the couch potato portfolio.I am willing to pay for the extra 5% return that I have achieved!Each to his own.

    • Ben Felix on March 19, 2018 at 2:42 pm

      That’s a good return, Mike, but statistically you are *very* unlikely to continue seeing numbers like that. You are much more likely to underperform a couch potato portfolio over the long-term. Paying 1% for financial advice (when can you retire, how much can you spend, should you rent or buy, what should your asset mix be etc.) is reasonable. Paying 1% for the expectation of higher returns is a losing game.

      • Mike on March 20, 2018 at 8:38 am

        I have been hearing that for the last dozen years since I switched from self directed to using my advisor, even if it some how goes back(which I doubt) to the means of 6-7% I have pulled way further ahead of my contemporaries,not to mention tax planning and tax efficient non registered portfolio investments and their drawdowns.

  4. Sir Tie on March 19, 2018 at 3:49 pm

    Any advise on how to minimize these fees? For example, would it make sense to move your funds every year from high cost (that I get through work) to self managed account with questrade?

  5. Dr. T on March 27, 2018 at 8:01 am

    My full-service brokerage charges me 1% of capital each year for my TFSA account, presently about $750 to (1) make a $5,500 deposit and (2) buy a stock with the deposit and any cash accumulated over the past year. Too expensive! Time to look for a cheaper option.

  6. Jim Wang on April 10, 2018 at 6:27 am

    When I did this, I learned that 1% in fees can cost you 3 years of retirement! It’s significant!

  7. Dash2Retire on April 10, 2018 at 3:28 pm

    I was listening to a Dave Ramsey podcast today and he went on a rant about how tired he is of people getting hyped up about fees. He said that the reaction to fees is way overblown and fees really don’t matter in the long run. I was shocked he said this, I actually had to back up and listen again to make sure I heard him correctly.

    As you pointed out, fees do matter. A lot.

  8. Bill on April 11, 2018 at 10:45 am

    I am also tired of paying advisor fees based on assets under management
    ( aum)
    1 per cent although low
    Can amount to a lot!!
    Managing myself not comfortable with
    Any suggestions?

  9. Gus on January 25, 2019 at 10:18 pm

    I went from about 4000$ in fees last year to less then 400$ this year, that’s a free family trip for me.
    R.I.P John Bogle you’re my forever hero.

  10. Brenda B on January 27, 2023 at 4:17 pm

    We are now entering into the retirement phase of our lives. In our case – we took over the reins of our our investing in 2013 and used the BMO Investorline platform and did very well. It was easy to buy our own ETF’s/Stocks and GIC and we saved Advisor fees for 10 years. Now that we are in the drawdown phase for retirement, we decided to move back to an advisor platform to maximize tax efficiency and planning and draw down of funds. We can justify the .90% advisor fee now that we are getting assistance with the retirement planning etc and feel we are getting value for money with this assistance.

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