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.
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.
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!