A financial advisor sent me an email after reading my column in The Globe & Mail titled, Would you give up 44 per cent of your investment over 25 years. It was actually one of the more cordial emails from financial advisors who were not happy with the column. I decided that I would publish his email on the blog in its entirety and address his points for all to see. I’ll use “Financial Advisor:” and italics to indicate the text from his email, and I’ll reply with “Preet:” and non-italicized text.
Subject: MERs
FINANCIAL ADVISOR: I am confused. Here I am, having been in mutual funds since 1994, a CFP since 1998 and all of my clients have more money than they have invested. In the financial press it would seem that 2.5% is a commonly accepted MER and if I keep the maths extremely simple, then clients would lose 25% over the course of 10 years.
PREET: I agree that a 2.5% MER is probably too high of a number to use in general. According to Dan Hallett, Director of Asset Management at HighView Financial Group, the asset-weighted average equity fund MER in Canada was roughly 2.26% in 2009. However, as a counter point, a particular fund that has been dissected in the media lately was Canada’s largest mutual fund with almost $13 billion in assets and an MER of 2.69%, the Investors Dividend Fund. There are plenty of funds with MERs over 3% as well, and in the context of highlighting the importance of fees, using 2.5% is completely defendable. Having said that, the Globe column example in which 44% (44.96% to two decimal places) of the potential value being consumed over 25 years was cited was based on an MER of 2.36% as I randomly selected a fund to use. Had I used a 2.26% MER fund, an investor would give up 43.53% over 25 years. Not a material difference. Had I used the Investors Dividend Fund MER of 2.69% an investor would give up 49.42% of their potential portfolio value, and a fund with an MER of 2.50% would give up 46.90%. You can calculate values for your own funds’ MERs using a spreadsheet I created here.
You state in the last line of this section that keeping the math simple means “clients would lose 25% over the course of 10 years” using a 2.5% MER value. I think it would be more precise to say they are “giving up” 21.12% of the potential value of the portfolio over 10 years. The equation and explanation are clearly provided in the column (note especially the comment of Michael Wiener, author of one of my favourite blogs Michael James on Money, on why the increased frequency of compounding slightly benefits the investor to understand why 2.5% does not translate into 25% over 10 years). I think you are confusing the argument of the negative effect of fees on performance with “fees = negative performance” somehow.
FINANCIAL ADVISOR: If I am to keep things very simple my clients would lose 2.5% of their funds each year in order to lose 25%. But why have my clients got more money than they have invested?
PREET: Because the gross performance of the funds is greater than the MERs.
Gross performance of a fund is the performance before fees. If a fund returned 5% before fees and had an MER of 2.5%, then using simple math the fund’s return net of fees would be +2.5%. All mutual fund returns in Canada are reported net of fees.
FINANCIAL ADVISOR: Perhaps it is because no mutual fund earns a return of 0% each year and then deducts the MER.
PREET: This could happen. If the gross return was 0% per year, the net return would be -2.5% per year. I’m pretty confident that given all the funds out there, I don’t even have to look it up to tell you this has happened in the past.
FINANCIAL ADVISOR: Perhaps it is because the MER is deducted from the return for the fund and then there is a posted rate of return.
PREET: Nowhere in the column or associated blog post does it suggest otherwise.
FINANCIAL ADVISOR: In some years, during the past 16 there have been negative returns but, in the majority of the these years, the returns have been positive. When a mutual fund posts an annual return of 4.5% and the MER is 2.5% it means that the manager/s of that fund had an actual return of 7.0%.
PREET: No arguments here.
FINANCIAL ADVISOR: While I will agree that it would have been much more pleasant to receive 7.0% than 4.5%, how can you argue that the annual MER automatically reduces the value of a person’s portfolio?
PREET: Because it does.
The MER is subtracted from the NAV of the fund. Hence, it reduces the value of the fund. I’m not sure how you could argue otherwise.
FINANCIAL ADVISOR: When an American investor (for example) places his/her money in mutual funds are there any costs? And if so, what are they?
PREET: I’m not sure of the relevance of this question, but: Yes, there are costs. They are very similar in nature to Canadian mutual fund fees, but generally lower in value. There are two main categories of fees: 1) Shareholder Fees (Sales loads, Redemption Fees, Exchange Fees, Account Fees and Purchase Fees) and 2) Annual Fund Operating Expenses (Management Fees, 12b-1 fees which are distribution and/or service fees, and Other Expenses which are comprised of custodial, legal, accounting, transfer agent, and other administrative fees). For more information, you can visit the Securities and Exchange Commission’s website for a more detailed explanation.
FINANCIAL ADVISOR: Many of my clients are ordinary working people who earn less than $60,000 per year (some, a lot less) and I meet them after work in their homes. I don’t know what happens in the USA but in the UK (where there are now no commissions to be charged) people rarely see their advisor; business is conducted over the phone or internet.
PREET: Many financial advisers in The United Kingdom meet with clients at their offices or at their clients’ homes after hours, as described on firms’ and advisers’ websites. Also, a cursory look at financial adviser job postings indicate candidates can expect to work evenings and weekends, meeting with clients face to face on a regular basis at various locations. If you have any evidence to support your claim, please provide it.
FINANCIAL ADVISOR: I live off the trailer fees that I receive from the mutual fund companies I deal with, and – no – I do not choose those fund companies or funds which give me higher trailer fees.
PREET: That’s good, because I know of a lot of financial advisors who are swayed to use products based on higher commissions that are attached to said products without being transparent about the conflict of interest to the client.
FINANCIAL ADVISOR: My plans are prepared – with integrity – free, my advice is free and I am not allowed to be fee-based and also collect trailer fees.
[NOTE TO READERS: I added the underline emphasis above – Preet]
PREET: Your advice is not free. It is deceitful to imply this as you would not provide financial plans if your compensation was not provided by the products you sell. The expenses embedded in the products are the source of your compensation, and you may or not be disclosing to your clients that part of the fees embedded go to you, but they’re there.
FINANCIAL ADVISOR: Anyway, fees are only tax deductible for non-registered accounts (goodbye RRSPS, RRIFS and TFSAs) and how would I charge fees to a young person starting out with an investment of $50.00 per month? Or should I wait until the people I contact (and then can call clients) have at least $50,000 tucked away and then I can charge them 1% per annum?
PREET: Firstly, it is important to understand that Client Advisory Fees are “potentially” tax deductible for fee based arrangements, while MERs are never tax deductible for the purposes of a client’s tax return. I wrote about this recently here and encourage those not familiar with the distinction to read more about it. Secondly, tax deductibility of expenses should not be the sole dictator of what types of investment accounts to use, and some would argue that using a fee-based advice arrangement with a tax-sheltered account is still valuable since the fees are more transparent, which is the real argument.
I feel you’ve completely missed the point of the column. It was not suggesting that everyone use a fee-based advisor at all. It was about transparency and providing clients with information that may impact their decisions. Right now, there is no reason to bypass a young investor who only has $50/month to contribute if all you are arguing over is hidden fees versus fee-based advice relationships. Go ahead and explain to them that you are using a Deferred Sales Charge mutual fund with an MER of 2.75% (as an example). If you’re transparent about it, they’ll see that (assuming a 5% DSC commission on new money and a 0.5% trailing commission and straightline market growth of 5%) that in the first year you are only making $31.64 before payout and maybe $22.15 after the payout (assuming a 70% payout rate) to provide advice and further, they’ve only paid $9.34 from their portfolio in expenses (assuming no account fees). Compare that to a 1% per annum charge which would have been $3.30 for that first year (assuming any dealer would allow it) and chances are they’ll be happy to let you charge them for a DSC on a high MER fund because at low asset levels, even relatively expensive mutual funds are low cost on an absolute basis. No one expects a professional financial advisor to work for free.
I don’t have any issues with the existence of DSC, high MER funds. I have an issue with a lack of transparency that allows for DSC, high MER funds to be used with clients who have more than a few thousand dollars invested because they don’t know any better. Because the truth is being purposely hidden from them by an industry that is in the business of providing financial advice. Last time I checked, fees one pays is a financial matter.
At some point that young investor could become a big investor, and with transparency and an advisor working in the client’s best interest, a switch in fee model, product or something else is an eventuality.
FINANCIAL ADVISOR: Back to the main point. Please give me an example of a mutual fund which has consistently reported a rate of return of -2.5% (i.e. actual return minus the MER).
PREET: I’ll humour you, even though this has nothing to do with the point of the column. A Globe Investor search for mutual funds and segregated funds with 10 year annualized returns less than 0% (after MERs, since all posted returns are net of MERs) yielded 592 results with data ending November 30, 2011. Here are a handful with links to their fund profiles on the Globe Investor site:
- Manulife Global Advantage: -10.10% 10 year avg, MER 3.07%
- Renaissance US Equity Growth: -6.67% 10 year avg, MER 2.73%
- Investors Global Sci & Tech-C: -6.66% 10 year avg, MER 2.92%
- TD International Value-I: -6.13% 10 year avg, MER 2.55%
- Russell Global Equity: -2.51% 10 year avg, MER 2.79%
Financial Advisor: I will give you an example (though I don’t have any client money in the fund)
Bissett Canadian Balanced Fund MER = 2.47%
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
| 3.80% | -3.40% | 9.50% | 9.30% | 10.40% | 9.20% | -3.80% | -20.10% | 19.60% | 10.30% |
These rates of return are calculated AFTER the MER has been deducted.
According to the calculations in your article, an investor investing $1,000.00 on Jan. 1 2001 would have only $759.49 left on Dec. 31 2010.
Preet: You’ve misunderstood. To calculate how much of your portfolio MERs will have consumed over time, the formula provided was 1 – e^(-25*m) for a 25 year period. To figure out the consumption over 10 years, we change the formula to 1 – e^(-10*m). For the above fund, this would be 21.89%. The annualized rate of return has no impact on this siphoning effect of fees. Had the fund had a 10 year annualized return of -2.5%, the effect of fees would still have consumed 21.89% of the portfolio’s potential value. Similarly if the fund had a 10 year annualized return of +25%, the effect of fees would still have consumed 21.89% of the portfolio’s potential value had there been no deduction of MER.
FINANCIAL ADVISOR: According to my calculations, the investor would have had $1,467.00 for a total return of 46,7%.
PREET: No debate here. If you started with $1,000 on January 1st, 2001 and added 3.80% in year 1, lost 3.40% in year 2, added 9.50% in year 3 and so on, you would indeed end up with $1,467. Perhaps this is where it will become clear as to what I’ve been talking about. Had there been no MER (no annual deduction of 2.47%), then instead of adding 3.80% in year 1, you would add 6.27% (3.80% + 2.47%) and so on. The series of returns would be individually increased by 2.47% and the cumulative return would increase from 46.7% to 85.8% for an ending value of $1,858. This represents a difference of $391 on a total possible $1,858, which is 21.04%.
You’ll note that we calculated this above as 21.89% using the formula 1 – e^(-10*m). The difference between 21.89% and the 21.04% calculated in the paragraph above is because the formula assumes continuous (daily) compounding (like in the real world) and the latter figure was calculated using the less accurate removal the of negative effect of the MER compounded on an annual basis.
Michael Wiener explains: “Here’s the gory detail on the reason for the difference. Adding percentages is just an approximation. In reality, the effect of the MER is to multiple portfolio value by e^(-0.0247) = 0.9756 each year. So, in year 1, instead of a return of 3.8%, without MERs, the investor would have had 1.038/0.9756 – 1 = 6.396% as a return. Note that this is slightly above the estimate of 6.27%. If you work out each yearly return this way, you’d get the correct figure in the end.”
To leave no stone unturned, here’s how $1,000 would’ve grown with and without the annual MER in chart form:
Now you can see $1,878.07 (ending value without MERs) – $1467.00 (ending value WITH MERs) = $411.07. Divided into $1878.07 and you get 21.89% exactly. Bottom line, the MERQ formula works.
FINANCIAL ADVISOR: I looked at the prospectus of 3 Mutual Fund Companies: Mackenzie, Dynamic and AGF. Nowhere could I find a section “Fees indirectly borne by the investor”.
PREET: Here they are.
I grabbed a simplified prospectus for each company and picked the first fund. Here are the screen shots of the section in question.
Mackenzie – see page 61.
Dynamic Funds – this is for their Marquis portfolios – see page 45.
AGF Funds – see page 44.
FINANCIAL ADVISOR: What I did find were sections, and tables, headed “Fees and Expenses Payable by the Funds“ Are these what you meant (sorry my computer has just decided to use French symbols – so no more question marks)
PREET: No those are not what I meant, but there is valuable information there as well.
FINANCIAL ADVISOR: There follows, in each prospectus, the comment “Alternatively, a fund may have to pay some of these fees and expenses directly which will therefore reduce the value of your investment in a fund.“ The only way this could lead to what you have propounded in your article is, as I have earlier stated, is if the rate of return in a fund was 0% each year AND THEN the management fees were deducted.
Please, some answers.
PREET: I believe you have misunderstood both the “simplified” prospectus and the column. If you have any counter points, or more questions, you have my email address. Thanks for contacting me.
Kudos to you Preet for addressing these questions candidly.
It’s disappointing to see any advisors still leading clients down the path of believing their plans & advice are “free”, despite many efforts in our industry geared towards transparency.
Ultimately, mutual fund investors are not paying for the “product”, rather they are paying for the coaching/advice/planning we provide. We need increased accountability in our industry to provide value in return for fees which investors are paying for our services, regardless whether these fees are embedded in the product (trailers) or paid separately (in case of fee based planning).
We are not in a “product sales” business, we are in a “service” business and fees charged must be weighed against the value of services we provide.
Cheers,
Silvio
Thanks Silvio. I think you are bang on: accountability is less than stellar right now in the financial services. Transparency is key.
Preet, you’re right, but I’m gettin’ up there and I don’t EVER recall a period where accountability in the financial services industry WAS stellar.
Oh how I wish, wish upon a star…….
P.S.
I think you may have a glitch in the Comments software or whatever. I posted several “periods” after “star” above, and they posted as a pair of brackets. Weird – I’ve never run into that before. I see in other comments there also appears to be random brackets, etc.
I see the periods, no brackets. Looks like a compatibility issue.
Happy New Year Preet. Interesting exchange – similar to many exchanges I’ve had over the years. One minor point: While it’s true that investors can’t claim any explicit deduction on their T1 for standard MERs, those fees do (in almost all cases) reduce the amounts that would otherwise flow through to the T3/T5 slips. So, there is at least partial deductibility for most investors. The extent of deductibility is product and asset mix dependent. But as you touch on, fees charged separately will almost always be more tax efficient than paying all fees at the fund level through MERs.
Happy New Year Dan. I was aware of the distinction, but will amend the wording slightly to avoid confusion.
Great article Preet. Raising the ire of advisors means that an issue exists.
In good markets,MER’s are seldom discussed, but in negative markets they become very painful. Do you think performance based fees would be a cure-all? It would seem to me that there has to be a scenario where everybody wins and loses together. Unfortunately it would involve many advisors to go without a paycheque if their investments didn’t perform. I’m not sure how many would survive (maybe that it a good thing).
I appreciate your writing and often share it directly with my clients. Keep up the good work.
The strongest guarantee I would believe in is if the advisor invests their money in the exact same way they invest their clients’ money. When it’s a different life situation, investing their close family’s money could also be a substitute.
Of course if they’re no good they will still lose money. And if they’re too good they won’t bother with clients. There is just too much going on to guarantee that the majority of advisors do what’s best. It’s like saying politicians should never take advantage of their power.
Investors who learn more on their own instead of relying on someone else will always have the potential to benefit from it. But like a bad advisor they can lose money too even if they are informed.
The takeaway I get from your comment is that the investor needs to be a bit more financially literate – which I agree with.
Hi Eric, performance based fees have their own disadvantages as well as they can encourage risk taking and then there is the matter of picking a benchmark. If you just used a relative benchmark (like an index) then asset mixes get corrupted. If you pick a blended average benchmark (equity and fixed income indices) then you have to beat the indices to earn fees (and this is harder than most people think). If you pick an absolute benchmark, like 5% then this again encourages risk taking and corrupts asset mix.
I think if we approach the question from the point of “where is the value from an advisor?” then I think we would see more of an emphasis on the value of planning and service as opposed to “market beating investment advice”.
This may be moving away from the main topic a bit but what are your thoughts regarding the Exempt Market from a fee perspective? What would be the pitfalls and/or benefits to the client? I have seen some solid performance from specific ones including fair fees and consistent returns. I know the markets can have anything from soup to nuts – what is your perspective?
Same perspective: fees for advice should be separate from fees of the product, no matter the product.
Nice job on a thorough set of answers to the advisor’s questions. You made a number of good points about the issue of transparency.
On the subject of the advisor’s problem with some keyboard keys changing function (and losing a question mark), you can fix this by pressing CTRL and SHIFT simultaneously. There are 3 modes and each simultaneous press goes to the next mode. So, whenever my keyboard goes crazy, I just press CTRL-SHIFT once or twice to fix it.
I actually was going to include that (as it happens to me all the time), but the length of the post was already getting out of hand.
Thanks Mike! I never knew that.
There’s also a setting in the control panel to just turn the damned thing off completely. I have to look it up anew each time I get a new computer, so I can’t remember it off-hand. Under keyboard or language settings (probably the latter).
SMACKDOWN for Preet! What’s next Mutual Fund Managers vs. Preet in a Steel Cage?
Seriously, I have issues with folks in the “industry” who portray themselves as somehow not trying to make a buck for themselves, and those that continue to say things like “I am not a saleseman”. I would rather someone was boldly honest about where they make their money, and let me as a consumer decide.
Game to Preet, Preet leads the match 1 set to Nil…
I think transparency is the best policy for everyone, and a good business differentiator for advisors these days.
Great break down Preet. As always, very thorough. One thing you may have overlooked though. Did you verify that this advisor is who they say they are? I know there are good advisors and others that don’t measure up but this is ridiculous. Are we not sure that this advisor is pulling your leg?
I agree, there are many great advisors.
I checked the identity of the advisor as best I could. His email matched his name, and a person with the same name is registered as a CFP. There are no guarantees, but I’m reasonably sure this is legit.
So cruel ….
Happy New Years Preet. Great article and the follow-up question set really shows the depth of knowledge of these financial advisors. It never ceases to embarrass me to be in the retail financial services industry. I would understand if clients asked those questions but these are supposed to be advisors that manage money not just sell things to unsuspecting clients!
Happy New Year Michael – hope the island is treating you well. I think the main problem is that we have a financial advice system based largely on commissions and incentives but the clients expect a fiduciary standard which does not exist en masse in Canada.
With respect to financial advice, does the fiduciary standard exist at all? It is my understanding that while an advisor can choose to hold him or herself to a fiduciary standard, nothing requires it.
Despite the good intentions that existed in the past, human nature being what it is, I expect that over time people tend to forget or make exceptions. Until it is required by law or regulation, I don’t think that you can take an advisor’s claim to a fiduciary standard at face value.
Once it is required by law… it has to then be enforced too.
All too true.
Preet,
I love the honesty that you bring to the industry.
Is there anywhere that shows the value of a MER and which ones are deserved versus not? (meaning the returns match the premiums paid).
Hi Steve – thanks for the comment. The value of an MER is a hard thing to quantify on a go forward basis, which is the problem. No doubt there are high performing funds that might have higher than average MERs, but since past performance has little to no impact on future performance it is of little value to an investor.
Hi Preet. First time I have come across your blog. Not sure why I haven’t been here before. Your article and especially your reponses to the advisor are so valuable. Frankly, I cannot believe that the advisor (who proclaims to have been in mutual funds since 1994 and a CFP since 1998 is even asking you some of these questions. For example, “Please give me an example of a mutual fund which has consistently reported a rate of return of -2.5% (i.e. actual return minus the MER)” Both the G&M and Morningstar have excellent resources for reviewing funds and as a financial advisor it is deplorable that he/she hasn’t taken the time to study those. Just what is he/she recommending to his/her clients and why? As a company, we teach people to be knowledgeable and responsible in learning about their investments. I realize as you state, that not everyone is cut out for managing their own portfolios, but many can with the right education.
Glad I found your blog and will continue reading it.
Thanks for stopping by David – I’ll check out your site. There’s plenty of market for both DIY investors and those who need full service, and everything in between.
Very true Preet. I think the one thing every investor should strive for is learning more about how their money is put to work. Even basic knowledge of how decisions are made and how the products they invest in work would be helpful. Perhaps share the http://www.getsmarteraboutmoney.ca site with your readers. They have a great mutual fund fee calculator that displays the results in a easy to understand pie chart and descriptive numbers.
http://blog.getsmarteraboutmoney.ca/index.php/author/PreetBanerjee
Cool. I should have looked harder. :) Thanks for the link.
Fantastic responses to these emails, Preet. Tough to beat logic and numbers!
Thanks SPF – glad you liked it!
Great article Preet!
Definitely going into my Weekend Reading roundup.
This article should be a mandatory read for every mutual fund investor. Oh wait, most mutual fund investors won’t see this, which is of course too bad :(
I too, can’t believe the advisor asked some of these questions.
“FINANCIAL ADVISOR: When an American investor (for example) places his/her money in mutual funds are there any costs? And if so, what are they?”
Are you kidding me?
“FINANCIAL ADVISOR: Back to the main point. Please give me an example of a mutual fund which has consistently reported a rate of return of -2.5% (i.e. actual return minus the MER).”
Wow…
After I read articles like yours, I thank myself everyday I picked up some personal finance and investing books, got into some great PF and investing blogs, and started my own financial journey.
GREAT work Preet. I enjoy reading the hate mail.
Mark
Perhaps I should post more Q&A’s to various emails I get. Some are quite a bit more… colourful. :)
Hi Preet,
Seriously, post this chap’s identity so that both his current AND future clients can run for the exits pronto! My 8-year-old sister has more financial savvy than this clown.
The letter that this fellow has written is truly shocking. As mentioned in previous comments, the lack of basic knowledge is disappointing. As someone in the industry, I am not sure whether he makes my job easier or harder. Probably both, but in different ways.
Perhaps he is not entirely at fault. There is a timeworn quote of that I am continually reminded of whenever reading about or speaking of the financial services industry:
“It is difficult to get a man to understand something when his salary depends on his not understanding it.” – Upton Sinclair
He entirely missed the point of your observations about fees. Perhaps a full understanding would be problematic for his advisory practice as currently structured?
I think you’re right: easier and harder at the same time, and in different ways.
You would be surprised how often I hear/use Sinclair’s quote. ;)
I found this article fascinating. I greatly appreciate your specific responses and direct way of addressing the issues while still maintaing a high degree of professionalism. I am curious with the new Exempt Market industry in Canada (new in that is is properly regulated), how has your research been on fees associated to Advisor who market these products and the EMD (Dealer’s) who offer them to Various firms as a product. I am curious to learn more about this. I am a big fan of disclosing how much I get paid to my clients. As I currently only sell Insurance it is very easy to show a transparent fee calculation to a client with an illustration. Thank you for raising awareness to the Canadian massess and I wish you all the the success you deserve in 2012!
Cheers
Hi Richard, same perspective on fees and/vs products. Transparency is key, unbundling is preferable. Exempt Market products run the gamut of risk and return just as with other products, perhaps more skewed by nature, but knowing what clients pay for advice and what they pay for product and separating the two is important.
Happy New Year Preet! Great article!! I appreciate you taking the time to respond to his email in detail and then sharing it with us. I wish all mutual fund investors would read this.
I’d like to see more of the “colourful” emails you get and your responses. :)
As a mutual fund investor for 10 years (before I started investing on my own) I can attest to what you have written. Over the 10 years I worked with 3 different advisers, paid thousands in fees, and achieved nothing in terms of return on my investments.
Thanks Preet for a very informative blog. My employer offers a Group RRSP through Sun Life. The Sun Life website provides information on MERs for the funds offered (shown below). I am guessing that I pay other fees in addition to the MERs that are eating into my returns. I intend to find out exactly how much I pay so that I can make a fully informed decision on whether or not I should investigte alternative investment strategies. I’ll start by asking about “indirect fund expenses born by investors”. Please keep up the good work.
PH&N Bond Fund 0.49 %
Fidelity True North Fund 0.95 %
SLF Money Market 0.19 %
BLK Bond Index Fund 0.30 %
Greystone Balanced 0.49 %
BLK LP Index Retirement 0.57 %
BLK LP Index 2020 Fund 0.61 %
BLK LP Index 2030 Fund 0.73 %
BLK LP Index 2040 Fund 0.73 %
BLK LP Index 2015 Fund 0.56 %
BLK LP Index 2025 Fund 0.68 %
BLK LP Index 2035 Fund 0.74 %
BLK LP Index 2045 Fund 0.74 %
B.G. Canadian Equity 0.59 %
BLK S&P/TSX Comp Index 0.30 %
BLK US Equity Index Reg 0.31 %
CI American Value Fund 1.04 %
BLK EAFE Equity Index 0.55 %
MFS International Equity 1.04 %
Tmpl Global Stock Trust 1.05 %
Rob, keep in mind that companies like SunLife often add the MER above on top of a 3rd party fund managed outside of their firm. The underlying fund will have a 2+% MER and the ones you see above are likely in ADDITION to the original.
Let us know what you find out Rob. The devil is in the details.
Testing
Hi Preet
Enjoy your column and have seen you a couple times on the CBC.
I have been investing for the last 10 years or so and was in mutual funds with over 2 percent MER’s. I have switched most of my mutual funds to index where it is less than one percent MER (about 0.70). One portion of the portfolio is not an index fund; it is a Canadian Equity mutual fund where the MER is 2.05.
I want to switch all of it into it’s Cdn index equivalent however not sure if I should at this time. My Canadian equity fund is currently underwater (I put in more than what it is currently worth), and the Cdn index equivalent’s nav is almost $2 higher. Should I switch now, or wait until my Canadian equity is valued more.
@Terrence Hi Terrence, the NAV of the index fund and the NAV of your current fund have nothing to do with one another. If the fund you own is very similar to the index anyways, there is not much reason to delay switching. Make sure to check on any redemption fees before you do anything.
If your fund is markedly different than an index, then it’s possible the fund has a different trajectory than the index tracking fund at any time. There is no way of knowing which will do better than the other over the near term though and switching to an index strategy essentially assumes you realize this anyways. You do know, however, that your ongoing costs will be lower right away upon switching to a lower cost, similar mandated product.
Hope that helps, but I do have to caution that information on this blog is for “entertainment purposes” only. Never make a decision based solely on information here as everyone’s situation is different and really should be checked against a (competent) professional’s advice.
Thanks for the information Preet.
I think Canadians are starting to realize and pay attention to MER mutual fund fees because of people like yourself. Keep up the good work. I talk to friends and family about mutual funds and explain how the MER works. They are astonished when they actually realize the mutual funds they are in have very high MER’s.
@Terrence Thank you for the very nice complement! It’s a tough road ahead for advocates, but I think we’re really starting to make some headway now. Cheers!
Preet, I enjoy your columns. Are advisors with banks paid more on their “grids” if they sell bank mutual funds, rather than funds from other companies? Thanks
@SamMansur Hi Sam, yes in some cases there can be additional compensation for selling in house programs. The bank branded individual funds may or may not get a bonus, but the in house “wrap accounts” and “portfolio programs” can often increase comp in the neighbourhood of 25%.
Hi Preet. I’m a financial adviser, and I believe that if fund expenses cost me 44% of a fund’s value over 25 years, that means I’m going to end up with 44% less than I had at the start. I demand answers!
Thanks for the chuckle :)
This is a great post. Even the “financial advisor” has trouble understanding MERs so how could they ever properly explain it to their clients. Instead they parrot sales terms like “free advice” as taught by their employers, the mutual fund companies.
Telling me that the advice is free implies that I don’t pay anything anywhere. This is how MERs become hidden fees, even if they are documented in writing. Education can certainly help but I don’t think it will reach the average client for example, who makes less than $60,000.
This was a fantastic post! I saw the length and never thought I’d read it entirely, but it was very engaging. It’s actually worrying how little this “Free financial adviser” understood.