Financial Groups, “we’re here to help?”
Updated: Apr 15, 2022
People who know me well know I harbour a tiny amount of animosity towards Financial Groups offering specialized, actively-managed, high-fee fund products. They know this topic can (will) be a trigger for me and something I have difficulty reserving my opinion on. I have had poor experiences with financial groups, namely and personally Investors Group and Assante, and have been a DIY (do-it-yourself) investor since 2018. In 2001, after a 15+ year relationship with Investors Group and ongoing disappointments with my portfolio performance and advisor’s engagement, being a sucker for punishment I moved our portfolio to another financial group, "Assante", with a promise to do better and because they offered tax support for expats. Eventually feeling similarly disappointed with Assante costs and nonperformance, in 2016 I started dabbling in managing my own RRSP (registered retirement savings plan) and non-registered investments through an online brokerage at my bank. In 2018 I moved all our money out of Assante and took it all over, never looking back and never regretting the decision. It didn’t take me long to see what was really happening by comparing my DIY RRSP performance holding only a few indexed, ultra-low-fee Vanguard ETFs (exchange traded funds) to the fancy-pants, actively-managed, ultra-high-fee Assante funds RRSP boasting superior products and performance. Not only did I accelerate our retirement with this move, I learned a lot of the downside of using these institutions to manage your finances.
Like many, I did not think I could do it myself. After all, “you’re too busy”, “it was way too complicated”, “it is extremely risky”, and you’re told, “you’d never be able to outperform our expert money managers”. You are led to believe you are getting the best-of-the-best service, not accessible to any others. These financial institutions are very good at enforcing and driving this narrative and making the stock market a very scary place. In the 30+ years I was with these outfits, I can honestly say they never taught me anything, and were very happy with taking the 2.5-3% in MERs and calling me once a year at RRSP and TFSA (tax-free saving account) time to remind me about my annual portfolio injection.
My basic experience is that these institutional advisors are brainwashed (sorry… I meant to say trained) to sell the products and services that net them the highest commissions and fees, even if they themselves are unaware of this. These fund products are inherently actively-managed. They will tell you, “you get what you pay for”? Which is sorta true? The higher the fee, basically the more people you are paying daily to touch your money. Fees do matter, though this is a topic that your advisor will never want to have a meaningful discussion about, because either they don’t understand it, or they do not want you to understand it. They are trained to ask circular questions or throw up smokescreens to change the topic if possible. They will ask, “how much do you feel is fair to pay for the best fund managers?”, or “do you think the fees are a large expense in a fund that has a 10% average 10 year return“? These types of “questions inside answers” are meant to further draw out your insecurities, making it tough to continue to challenge or learn anything about the fees.
The first thing to understand is a mutual fund is simply a mix of stocks and/or bonds and/or other cash equivalents that are meant to deliver a return (goal) to whomever buys them. They are not magic, and in reality, you could build one yourself if you wanted to. However, it’s much-much easier to buy them already constructed and forever balanced. Because they are a very large mix of stocks/bonds/etc they will pay distributions (dividends/interest) based on the various holdings in the fund. High dividend funds are full of high-dividend paying stocks. Index tracking funds are full of stocks that are meant to track a market index. And if they are balanced to risk, they will have a mix of stocks and bonds to deliver less volatile performance. Again, they are not magic! You can look up any ETF and see what the stock holdings or bond mixes are. Take a look at vanguard.ca , they have a great website and the fund sheets are all there and very transparent.
So this is where I want to talk about MERs (management expense ratios, … or simple put, fees). If you are young and just starting out, these Financial Groups will hunt you down and separate you from the herd. They are set up at trade shows and online, and are quite good at advertising through word-of-mouth, commercials, business channels, and billboards. They will get your phone numbers, set up peronalized appointments with people in ties who look very successful, make fancy financial analysis reports and charts, and work extremely hard (initally) to get their hooks into your cash. Once they have it, you will find it very difficult to understand or touch your money again. It will be very hard to divorce yourself from these institutions. The smaller your portfolio, the higher the fees. And negotiating lower fees is extremely hard because they all work on a tiered fee system. Like car salesman, the guy you deal with is not the guy who can help you with lower costs. They will start you around 3% and don’t want to talk about fees again until you surpass $500k in your portfolio. At this point they may lower you a half a percent. But let’s do the math. Up to $500k you are paying $3k/$100k/yr in fees. So at $500k you are paying $15k/yr with the possibility of lowering it by $3.5k when you hit that threshold. The crazy thing is, your portfolio only has to reach $600k for them to get back to the $15k/yr fee they were taking before, and you’ll find you’ll get there A LOT FASTER with the half percent fee reduction (go figure). They won‘t want to discuss another fee reduction until your portfolio hits $1MM. That is, if it ever does. At $1MM and a 2.5% MER they will be taking $25k a year now in fees. At $1MM they may drop it by another half a percent, lower your fees to $20k at $1MM. And, eventually they will be back to $25k in fees when your portfolio reaches $1.25MM. My opinion today is if you’re paying over 0.5% you are paying too much. The reality is these institutions would prefer you not to get too rich, and to stay in the higher fee structure as long as possible. This way they make more and have you on the hook longer. The whole industry is designed to pay everyone in it as long as possible but you. Unless you are a very high earner, and maximizing your RRSP and TFSA contributions every year, you may never get away from the 2-3% fees these institutions charge.
So why do fees matter? Well, remember that a fund is a large mix of stocks and bonds. And remember, they regularly pay you distributions (dividends and interest) through the year? Well, most funds will pay these distrubtions at 2-3-4%/yr. Some high dividend funds pay marginally above this, but index funds, balanced funds, and real estate investment trust (REITs) will pay in this range and there is no beating this average distributions unless you are under-diversified in the market or taking on a tad more risk. What I mean by this, is you may have a smaller basket of higher dividend-paying stocks, and are willing to take the risk associated with this approach to net the higher dividends, though this is ill-advised. OK, so, if you are being skimmed fees at 3% and receiving distributions at 3% or lower, ….. can you see the problem? These institutions are taking either all or most of the “annual distributions” from your funds into their own pockets. This is money that is guaranteed income from your invesments, unlike capital appreciation, and would be otherwise reinvested into the fund through a dividend reinvestment plan to provide the compounding effect. At a 3% fee, you are effectively floating on the fund price, which is largely effected by the market capitalization of the stocks and number of shares held inside these funds. The only way for you to make more money in this scenario is for the fund price to keep going up by people paying more for them then you did, and staying vested, because your DRIP (dividend reinvestment plan) is severely crippled by these high fees. This is what I realized after many years of pain in these institutions. They report an annual return % on these funds, but fail to report that they are robbing you of your passive income in fees. Now they do a bit better job reporting it due to new legislation, but still have no qualms about taking it and trying to avoid the conversations. So the half percent you might be contributing is getting a total return of whatever percent, but the actual dollar value could have been 5-6X greater if you weren’t paying those fees! Smoke and mirrors. I was injecting money into them every year and could never understand why my portfolio was never (significantly) growing past the point of my accumulative contributions despite the reports telling me I should be getting 9% or whatever. You couldn’t understand the reports you were getting. Units in and units out, stuff moving in and out, regular fund switching, etc. all designed to confuse you and make it seem a lot more complicated to make money than it was.
At any rate, I just went through this painful exercise again with my mother, who was moving to a retirement center. She had been with Investors Group for ~30 years or more. My Dad passed away in 2015 and they were both unhappy at that time with their advisor and porfolio management, but like many seniors and retirees change does not come easy. So they held on all these years. In January my Mom and I decided it was time to cut the Investors Group umbilical cord. She had recently sold her condo which was going to put her in some cash and into a different fee tier with at Investors Group if she stayed. She was paying 2.3% at the time. After a short discussion on fees with her advisor, and the same sales pitch about fees I’ve heard many times in my life and described above, I just couldn’t justify giving these jokers 2% for their “expertise”. Not when you can get this and more out of term GICs these days, and without the risk or volatility of being vested in the market. Where she is at now, she doesn’t need these worries. It was a great time for her to make a leap. So we set her up in tiered GICs at her bank (CIBC). Not only is this less stressful, but the financial advise offered is free and readily accessible.
I’m going to make one last comment about Investors Group and similar Financial Groups. They are much better at taking your money than giving it back. The transaction of transferring her IG funds out to the bank was a 8 week process! You can guess who wins and loses in this transaction? Two extra months of fees and two lost months of returns. Either way you’ll come out ahead in the long term, but frustrating none-the-less. Not only was it frustrating, but any questions or concerns are no longer supported through the local office and you need to painstakingly call the main office in Winnipeg for answers. They are not set up to help anyone leaving their cult.
The underlying message here is fees matter. You cannot grow or accelerate your savings when you are paying crippling annual fees. The other message here is, you can learn and do this yourself! Don’t be bullied or lulled into thinking you can’t by these Financial Groups. Start by setting up an RRSP and/or TFSA in a trading platflorm with your bank. I use Investors Edge at CIBC, but my kids use Questrade. There are lots of options, but minimizing your bank and trading fees and consolodation of your assets should be your ultimate goals. Set them up and buy an ETF (exchange traded fund) like VGRO and/or VRE (Vanguard products) with your next annual contributions (or better, set up monthly contributions). Buy VDY if you want to compare a high dividend paying fund. Whatever you do, make sure there’s diversification. When you’re starting, keep it simple. If you have 3 funds just buy them 33.33% each and maintain. I like Vanguard products for their very-very low and competitive fee structures and management philosophies. However there are other low-fee ETFs out there, and these types of product offerings are continuously growing. When I started I looked at The Canadian Couch Potato to get an idea on some standard portfolio constructs and a starting point. Set them up to DRIP (dividend reinvestment plan) the distributions back into the funds and watch them grow. Hands off though! You will have to weather routine market dips and this is just part of the DIY investor life. During these dips you will be DRIPPING in cheaper, able to buy more shares, which really acclerates your returns when markets recover.
The best financial decision I ever made was to try it myself and learn. The second best decision was to do it all myself!