The high cost of food and mortgage payments crushes household budgets these days.
The high price of investments just hurts your retirement.
It’s human nature to worry more about what’s happening today versus the future, but retirement could last 30-plus years. You owe it to your future financial security to get more militant about investing fees. Try channeling some of your anger about high grocery prices.
A recent report from Canada’s securities regulators shows that fees for two bedrock investing products have failed in recent years. The inference made in the report is that upgraded disclosure requirements for mutual funds and exchange-traded funds have led to more cost-conscious decision-making by both investors and the investment industry.
The declines on an industry-wide basis are minor and will remain so in the future until investors demand better. But at the same time, there’s a thriving low-fee investing niche here in Canada. It’s small, but it has everything you need.
Back in 2016, securities regulators began requiring investment companies to disclose how much clients pay for investment advice, and how their accounts have performed. A just-released study commissioned by the Canadian Securities Administrators shows how mutual fund and ETF fees changed.
On an asset-weighted basis, giving more emphasis to bigger funds, the average change in management expense ratios was a decline of 0.13 percentage points from 2013 to 2016 and 0.16 percentage points from 2017 to 2020. For ETFs, the average MER change was a decline of 0.03 points from 2013 to 2016 and 0.04 points from 2017 to 2020. The lower decline for ETFs results from the fact that they already have comparatively smaller fees.
Tim Shufelt: Despite high fees, Canadians remain perplexingly loyal to mutual funds. Here’s why
Investment industry polls show there’s still some uncertainty about fees investors pay and what precisely is covered and not covered by the new fee disclosure rules. But with fees, it can be more productive to look at the small picture as opposed to the big one.
A good example can be found in the balanced fund category, which is popular because it combines a diversified blend of stocks and bonds in a single convenient product. The CSA study shows that asset-weighted MERs for balanced mutual funds fell steadily from 2013 through 2020 from 2.1 per cent to 1.78 per cent.
The ETF version of the balanced fund is called the asset allocation fund, and it typically comes with an MER of 0.2 per cent to 0.35 per cent. About $25-billion has been invested in these funds since they were popularized about six years ago, which is small but still encouraging. Even if you pay a commission to a broker to buy an asset allocation, the low MER still means significant savings. Note that mutual fund fees include a segment to cover advice and service, while ETFs are self-serve.
Commissions charged by online brokers to buy stocks and funds can be as much as nearly $10 per buy and sell transaction. But there are some zero-commission brokers – Wealthsimple, National Bank Direct Brokerage, Desjardins Online Brokerage and, with some limitations, TD Easy Trade. Use one of these brokers or apps to invest in asset allocation ETFs and have a low-cost, diversified investing plan you can follow for decades.
You can now set up an account at an online broker or trading app without the need to visit a branch or email in forms. Bank branches do exert a powerful influence on investors, though. The RBC Select Balanced Portfolio, available for purchase through the Royal Bank of Canada branch RY-T network, had assets of close to $52-billion as of early May.
Canada’s worst and best performing ETFs over the last three months
The MER for the branch-sold version of this fund is 1.94 per cent, a lot of which goes to cover advice. If you’re not feeling the vibe of that service, consider the cheaper asset allocation ETF you buy on a self-serve basis.
A risk in raising awareness about fees is that you end up shaming people for their investing decisions, which isn’t a great motivator for change. So, let’s try this: You’re investing? That’s great, but do you know how much you pay in fees and how this amount compares to alternatives? If you pay less, you have a strong chance of keeping more returns for yourself.
Accumulated savings on lower fees could very well mean a more comfortable retirement. Making this week’s groceries more affordable is the most urgent task, but saving on fees will pay off.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
