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.

Print Friendly, PDF & Email

16 Comments

  1. Liquid on July 23, 2020 at 2:54 pm

    It’s nice to see the big banks have come out with their own versions of index funds. Competition and lower cost solutions are always nice to see as a consumer. 🙂 What do you think about buying the underlying stocks of an index directly, Robb? My portfolio is worth about $750K and even if I buy low cost ETFs that has an average MER of 0.20% that’s still over $1,000 a year I’m paying and never getting back. As a buy and hold investor I’m wondering if it’s better to simply buy the 60 companies in the S&P/TSX 60 index and leave it at that. Technically it would still be index investing, but at a lower cost than the usual method.

    • Robb Engen on July 23, 2020 at 6:22 pm

      Hi Liquid, I think it could get extremely complicated and costly to build, monitor, and rebalance a portfolio of individual stocks. How would you weight the 60 companies? What about when Shopify rises faster than the rest of your portfolio – do you sell some shares? And then buy what? Unless you’re using a truly commission-free broker (WS Trade) this could be more costly than you think.

      Not to mention you only have Canadian companies in your portfolio. As you know, Canada makes up but a small slice of global markets (3-4%). Buying the 500 stocks in the S&P 500 seems pretty daunting.

      The point is, yes you give up a small cost to own the ETF(s) or index funds but don’t ignore the advantages of instant diversification, rebalancing, and not having to worry about monitoring individual stocks.

      Finally, this post is aimed at the average retail investor who really should not be purchasing individual stocks at all.

  2. Howie Wiltzer on July 23, 2020 at 3:26 pm

    Just a heads up. At $50K you can go into the Premium Class version of the CIBC Index Funds mentioned above. At those amounts the MERs are in the 0.39% range (the International Index Premium Class is a bit higher at 0.65%). The overall MER for the allocation you mentioned would be about 0.45%!!!!

    • Robb Engen on July 23, 2020 at 7:27 pm

      Hi Howie, thanks for the heads-up on those CIBC index funds. I used the ‘A’ series funds but it was interesting and nice to see the other lower cost options available.

      So there you go, CIBC clients with more than $50k – ask for the Premium Class version of the CIBC index funds.

  3. Theresa P. on July 23, 2020 at 3:29 pm

    Robb—-would you know of any bank that would have an ETF or similar investment vehicle for my US funds? I would prefer to not exchange them at this time, despite having no intentions of travelling into the US within the next few years. Longer if Trump gets re-elected!! Presently the money sits in a daily-interest account earning pennies.

    • Robb Engen on July 23, 2020 at 7:38 pm

      Hi Theresa, provided your time horizon is longer than say three years you could open up a discount brokerage account that allows USD and buy a conservative U.S.-listed ETF.

      RBC Direct Investing offers dual-currency accounts, as does Questrade. There are others as well.

      You could look at a conservative asset allocation ETF like iShares Core Conservative Allocation ETF (AOK), which is about 65% fixed income and 35% stocks. Its 10-year annualized return is 5.27%.

      Even though it’s hard to let money sit around and earn next to nothing, especially in USD when there aren’t a lot of safe interest-bearing options, you usually have those funds for a reason – whether it’s for emergencies or to fund short-term future travel costs. That means the best place to park it is likely in cash.

  4. sam on July 23, 2020 at 5:10 pm

    is it possible to replace bond with precious metals ?

    • Robb Engen on July 23, 2020 at 7:41 pm

      Hi Sam, if we start with the question of whether it’s possible to buy precious metal index funds the answer is no, at least not to my knowledge.

      Next, I would ask why you would want to replace bonds with precious metals?

  5. George Y. on July 23, 2020 at 7:35 pm

    Robb, would I be able to buy these bank index funds from my Questrade account? I’ve been trading stocks in the account and am thinking of taking on less risk by investing in these index funds instead.

    • Robb Engen on July 23, 2020 at 7:47 pm

      Hi George, yes you can buy index funds from Questrade – in fact, TD’s e-Series funds can now be purchased online at most discount brokerages.

      Here’s the problem with buying mutual funds with Questrade – they charge $9.99 per trade! Seriously, the king of low cost investing charges a $9.99 commission per trade for mutual funds.

      Since you’ve already got a Questrade account you’d be better off buying an ETF – purchases are commission-free and most index ETFs are even cheaper than TD’s e-Series funds.

      Check out the model portfolios I’ve outlined in this article: https://boomerandecho.com/top-etfs-and-model-portfolios-for-canadian-investors/

      The easiest of these portfolios is something like Vanguard’s Balanced ETF (VBAL), which is a 60/40 globally diversified portfolio that comes with a MER of just 0.25%.

  6. Christina Teskey on July 24, 2020 at 12:07 pm

    Hi Robb — I just tried to implement the “balanced fund” approach with my RBC Spousal RRSP. First of all, my Investor Profile (despite being Aggressive Growth) conflicted with what I was trying to purchase online, so it blocked me. Then when I phoned RBC, they confirmed that I can’t buy the Canadian Bond Index fund because it’s only available through an investment advisor. Blocked again! My only choice is to move the funds into my Royal Direct account where I can do what I please with them. RBC has very minimal offerings for and ways to buy index funds — it’s disappointing.

    • Robb Engen on July 24, 2020 at 12:37 pm

      Hi Christina, thanks for sharing your experience with this, and I’m sorry you weren’t able to implement the balanced index fund portfolio. I did some digging and found similar issues with the RBC Canadian Bond Index Fund – RBF700, but I also found another bond index fund called:

      RBC Canadian Government Bond Index Fund (RBF563). It’s purely government bonds and so it has lower 10-year returns than RBF700 (2.9%) but it’s also slightly cheaper at 0.61% MER.

      Christina, I’ve had a client specifically execute this strategy with her RBC mutual fund salesperson. She had to do it in person, and he did kick, scream, and flop on the ground a bit, but she did in fact get the four index funds in her RBC mutual fund portfolio (without having to go to RBC Direct). I’ve seen the statements with my own eyes, so I know it can be done. Unfortunately, it might need an in-person visit.

      • Christina Teskey on July 24, 2020 at 12:52 pm

        They do kick and scream, don’t they? 🙂 I’ve had two sales people question my strategy and ultimately become very unhappy when they can’t convince me to buy something else.

        I saw the Canadian Government Bond Index fund but wanted to push for the other one. Thanks for finding a substitute.

        As for this round of switches, I’ll have to gather my strength for another go around before I call again.

      • Markus on July 25, 2020 at 5:17 am

        That’s funny! I guess I should have “kicked, screamed, and flopped on the ground a bit” when I wanted to switch from RBF563 to RBF700. No luck for me at that time. I’m now with Questrade, investing in XBAL. And with Qtrade for Spousal RRSP investing in TD e-series (with automatic contribution). My yearly visits to RBC until my switch had always been incredibly painful – every time they wanted me to switch away from CCP into their Canadian Selective Conservative Portfolio (high MER, mediocre to poor returns).

        • M-A Russell on August 9, 2020 at 9:38 am

          I confirm simply awful RBC service. I got so fed up I’m moving all my RRSPs away from RBC. Just when I think they can’t get any worse they actually do! But I do keep my chequing and emergency savings there for convenience. Great article as I am learning a lot.

  7. Caron on July 24, 2020 at 8:22 pm

    Very informative post as usual Robb. I had no idea the banks had their own ETF options!

Leave a Comment