Weekend Reading: Breaking Up With Your Advisor Edition
I recently coached a client through the process of transferring her existing RRSP, TFSA, and non-registered investment accounts away from high fee managed mutual funds and over to a self-directed investing platform. The goal was to reduce investment fees from an average of 2% on her balanced portfolio down to 0.25% with a balanced asset allocation ETF.
The asset mix wouldn’t change – both portfolios likely hold the same underlying assets – but the fee reduction is significant. It’s helpful to convert the percentage into a dollar amount. The combined portfolio size was roughly $1M, so at an average of 2% her fees were costing $20,000 per year. The new self-managed ETF portfolio would cost just $2,500 per year.
To be clear, switching to a low cost ETF portfolio is not a panacea for improving investment performance, especially in the short-term. A broadly diversified balanced portfolio is still down nearly 10% year-to-date. But by switching to a low cost ETF portfolio this client is all but guaranteed to outperform the similar high fee mutual fund portfolio over the long term.
You’d think the idea of saving $17,500 per year in investments fees would compel more mutual fund investors to make a change. But money is as much psychological as it is about the numbers. There may be a long-term relationship with the existing advisor mutual fund salesperson. He or she may even be a close family friend. Breaking up is hard to do.
When coaching clients through this process I always remind them that there’s no need to “break-up” with their advisor. The transfer of funds actually happens at the new financial institution. That’s right, if you want to move from “red” bank to “green” bank, you go to green bank and initiate the transfer from there.
Open an account at the new institution, then open the appropriate account types that mirror your existing account types (RRSP, TFSA, non-registered, spousal RRSP, LIRA, etc.).
You’ll eventually get to a section that prompts you to fund your new account with new contributions or by transferring funds from an existing account. Select that option and enter the account details from your existing institution (have a recent statement handy). Some platforms allow you to upload a statement, while others make you fill out the details manually.
Once the transfer request is accepted it can take about 10-14 business days for the funds to arrive. Your new institution contacts your existing institution to request the transfer on your behalf.
You can transfer funds “in-kind”, meaning the portfolio moves over exactly as-is, or “in-cash”, meaning the existing institution will liquidate your entire portfolio and send a cheque to the new institution.
Transferring in-cash is likely the preferable option in a registered account. That’s because there are no tax implications for selling your existing investments inside a registered account (RRSP, TFSA). This is not a withdrawal and a deposit – it’s a direct transfer between institutions where your funds remain in the same tax-sheltered account.
Transferring a non-registered (taxable) account requires more thought. That’s because selling your existing funds and transferring in-cash is considered a taxable event, triggering a capital gain or loss on each security sold. In this case, transferring in-kind may be a better option.
Now, once your existing institution receives the transfer request then you should expect a phone call or email from your existing advisor asking what’s going on. Don’t be surprised if your advisor tries to talk you out of this transfer, or at least offers some parting words of wisdom.
It’s because of these often uncomfortable and awkward exchanges that I recommend initiating the transfer first before having the break-up conversation. You’re less likely to un-do what you’ve already done.
Related: Breaking up isn’t hard to do. How to transfer your RRSP.
Still, if you’re set on having the conversation ahead of time I’d recommend preparing a list of reasons why so you can respond to your advisor’s playbook of rebuttals.
Go to Morningstar and look up your mutual fund performance versus its benchmark index and other funds in its category.
Mention the simplicity of an all-in-one portfolio and how it automatically rebalances for you. Talk about the diversification and how you’re staying invested in a similar asset mix with similar underlying holdings.
Finally, the closing line:
“It’s not you, it’s your fees.”
This Week’s Recap:
It has been a while.
Last week I suggested it’s time to check in on your financial plan.
Earlier this month I looked at using annuities to create your own personal pension in retirement.
I was happy to be included as a panelist once again for MoneySense’s annual ETF All Stars. No surprise that my “desert island” pick is Vanguard’s All Equity ETF (VEQT).
Listen for me on an upcoming episode of the Rational Reminder podcast where I’ll be chatting with co-hosts Cameron Passmore and Ben Felix about breaking up with your mutual fund advisor and some of the incredible (and demonstrably false) rebuttals I’ve heard over the years.
Promo of the Week:
Interest rates are ticking up and yet some of you still have money parked in a big bank savings account earning a pitiful 0.01% – 0.10%.
It’s time to switch to EQ Bank’s Savings Plus Account and earn a healthy 1.50% on your emergency fund or other cash savings.
Remember, EQ Bank offered rates as high as 2.45% in March 2020 before emergency rate cuts kicked-in. As rates rise, expect some more upside here and a return to ~2% by the end of the year.
I use EQ Bank for my own emergency savings. I like that I can connect the account to my main chequing account and transfer funds within a day. I also like the fact that I can pay a bill or make an e-Transfer from EQ Bank and that there are no account fees.
Weekend Reading:
Worried about stocks? David Booth, founder of Dimensional Funds, explains why long-term investing is so crucial.
Retirees fear this falling stock market, but Andrew Hallam says our reactions to fear are more damaging than anything the markets or inflation could ever hit us with.
As Rob Carrick explains, nothing happening with stocks and bonds lately will matter when you look back a decade from now.
Jesse Cramer explains why you’re probably using the 4% rule all wrong:
“You probably shouldn’t eat too much candy.” Is that an aggressive admonishment? Or a conservative suggestion?
If you’re a 9-year-old on Halloween, it’s aggressive. Don’t limit me! I want to eat all the candy!
But if you’re a paranoid dentist, it’s conservative. Why leave the door open to any candy consumption? Don’t you realize one mini Snickers can cause a cavity?!
The 4% rule is the same.
A must watch video by Preet Banerjee on how to manage your emotions when investing:
A really important white paper by PWL Capital’s Ben Felix on finding and funding a good life. It’s an overview of the non-financial considerations that deserve consideration in financial decisions.
Here’s Charlie Bilello on the biggest mistake an investor can make.
Crypto is a solution is search of a problem – or problems. So what is the point of crypto?
“People in the crypto space argue that it’s still early. We’re about 13 years in. At a time when technology changes rapidly, how early is that, really?”
Michael James on Money asks why do so many financial advisors recommend taking CPP early?
Finally, the great junk transfer is coming. A look at the burden (and big business) of decluttering as Canadians inherit piles of their parents’ stuff.
Enjoy the rest of your weekend, everyone!
What?!!? You’re returning to the RR podcast? That’s great to hear. Look forward to listening once again.
Also, thanks for mentioning the Morningstar comparison site. Heading over there now to compare some legacy RESP funds I’ve been procrastinating (hesitating?) on moving….
We’re recording tomorrow, but I think it’s for this week’s (Thursday’s) episode.
The Morningstar comparison feature is a gem. I’m less fussy about switching up the funds inside an RESP unless the fees are egregiously high. I’ve kept my kids’ RESP at TD using their e-Series funds because there are no fees for buying and selling, and I like the idea of being able to go to a bank if there happens to be any issues withdrawing funds when my kids are in post-secondary.
With the changes to funds that charge trailer fees and the e-series are you still able to keep those funds in your RESP? I have been told that TD will be switching them to different/similar funds without trailer fees but with higher MERs.
Hi Darby, I manage the RESP through the TD Direct Investing (WebBroker) platform so I’m still able to purchase and hold the e-Series funds.
It was on the TD mutual fund (EasyWeb) side where clients were told they could no longer buy e-Series funds.
I am surprised at that. I received this message from TD Direct Investing back in March. The e-series funds all have trailer fees so I would think they would be included in this message.
03 Mar. 2022Changes to your mutual fund holdings
A Canadian regulatory change, effective June 1, 2022, means only mutual funds without trailer fees will be allowed for purchase in your TD Direct Investing account. You may notice some updates and account activity ahead of this date as we prepare for this change.
What you need to know
As of March 7, 2022, only mutual funds without trailer fees will be available for purchase on TD Direct Investing platforms.
Between March and May, you may notice exchange activity within your account to switch you, where available, to a series of the same or similar mutual fund that is, or will be by June 1, 2022, non-trailer paying. These transactions will show in your history and on your account statement and will cause no tax implications. Where there is Systematic Investment Plan (SIP) set up and a non-trailer paying series available, the SIP will be automatically switched when your mutual funds series is switched.
There is no action needed on your part at this time. We will work with mutual fund companies to support a smooth transition.
Thank you for choosing TD Direct Investing.
Hi Darby, I see what you’re saying now. There were two separate announcements. One was about limiting the mutual fund options available through the TD mutual fund side, forcing TD e-Series holders to move to TDDI if they wanted to continue buying e-Series funds.
This one is about the class action lawsuit that targeted discount brokerage platforms who were selling funds with trailer fees. Since a brokerage is “order-execution only”, no advice can be given. So it makes sense that they shouldn’t be selling A-series funds with trailers designed to pay for ongoing advice.
The e-Series funds I don’t believe will be affected by this. For one, I know a message pops up when you buy e-Series funds that says there’s a trailing commission charge – but it’s not really the same thing as you’d see when buying an A-series fund (which have built-in 1% trailers). The MER on TDB900 (Canadian index) is 0.28%.
Second, I’ve been purchasing these funds monthly since March with no issues. There hasn’t been any switching or anything like that in my account. So I think we’re okay!
Thanks Robb. I spoke with TD Direct Investing today regarding this issue and they confirmed that the e-series funds would not be affected by the ruling about trailer fees because they have stopped the trailer fees associated with the e-series funds. They assured me that we were good to go and could continue to purchase more units of the funds in the future. Also confirmed that on my year end statement of fees and charges that the trailing commission for the e-series would no longer appear since they will have stopped it as of June 1, 2022.
I’m not sure if this is true for anyone who may hold these funds at different investment institutions though??
So what happens with non-reg transfers of the different class of fund that is only sold by advisors? I’ve had a few instances of self-directed providers informing me that the fund type I’ve transferred can’t be held in my account. I know they do switches but will it be done automatically at transfer time?
Hi Frito, yes this can be an issue and I think it varies depending on which brokerage platform you’re using. For example Questrade does have a wide variety of mutual funds available on its platform, but they can’t accept every single fund or fund type.
Solutions can be messy…switching fund classes is one option, partial transfers is another, and in-cash transfers for those specific funds is another (depending on the capital gain position and your willingness to trigger a gain/loss).
So based on this scenario, would the account holder have to do all the research and rejigging or is it something that say Investorline or Webbroker would provide as part of the transfer service?
This might be the exception but I had a peaceful and pleasant transition from using an advisor to being self directed. The advisor knew months in advance that I would be leaving and didn’t try to talk me out of it. They also helped with the transfer process as there were a few unexpected things that happened along the way. I think it helped that the advisor was a certified financial planner and really did act as a fiduciary and in their client’s best interest. The advisor was IIROC licensed so I was able to sell out of mutual funds and buy the final ETFs while still with the advisor, and then transfer everything over to the new accounts all in-kind. (I didn’t want to risk being in cash and out of the market during the transfer process.) I was also able to sell funds in the taxable account over a December and January period so that I could split the capital gains over 2 tax years.
Hi Brenda, that’s really nice to hear – thanks for sharing your experience!
My “advisor” never noticed when I transferred everything to my Questrade account. He had already dumped me to a junior advisor because my account wasn’t large enough or active enough and junior never bothered to call me to introduce himself.
Same thing with me as well when I transferred to Questrade. Surprisingly no one at the “big bank” bothered to call and talk me out of it.
Hi John & Jim, thanks for sharing. This is probably the typical experience at a big bank unless you’ve had the same assigned advisor for a long time.
Transferring “in-cash” is likely the preferable opinion in a registered accounts ??? Is this a typo, or am I confused?
Hi Stephanie, not a typo. Transferring in cash means the transfer request will instruct your existing financial institution to sell the holdings in your account and then send a cheque to the new institution. It shows up in your new account as cash, and then you can buy whatever you want.
This is preferable for a couple of reasons. One, your existing mutual funds may be proprietary to your existing institution or dealer and may not even be available on your new self-directed platform. Two, since you likely want to sell the existing holdings anyway and move to a low cost ETF portfolio you might as well get your existing institution to sell on your behalf as it will likely save you some transaction costs.
As I mentioned in the article, transferring in cash does not mean withdrawing from your RRSP or TFSA. This is a federally regulated event that occurs all the time and your funds remain in their tax-sheltered state while being transferred to a new institution.
Hi Robb,
Like Stephanie, I thought there was a typo, but your answer about institution-specific mutual funds completely makes sense with me.
However, if you are holding individual stocks or commonly available ETFs, transferring “in kind” would be the better option.
Fantastic paper by Ben Felix. Thank you for sharing it! I’ll definitely be referring to it often, and pestering friends with it 🙂
I was looking at opening an account at EQ Bank as per your Promo of the Week but I checked the reviews and they scared me away. I have never seen so many negative reviews. There are very few positive ones and I just can’t risk the hassle that the reviewers say they have experienced. I checked the dates of the reviews to see if maybe they were old and that EQ Bank had resolved the issues people were having but no they were as current as a few weeks ago. I like the high interest rate but the hassle that seems to go with it just isn’t worth it to me.