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If you are among the millions of Canadians being charged annual mutual fund and other investment fees totaling 1.5% to 2.5% or more, switching to lower-cost investing may be the key to achieving that goal. You may even lower your risk.
I recently asked a select group of Canadian investors to describe, in their own words, their personal experiences in making the switch and to share the lessons they learned along the way. Their responses may help you determine whether making a similar change might be right for you.
This article is the first of a three-part series, and describes authentic investor experiences with former advisors prior to switching. In part two, investors will discuss their experiences with the account transfer process while part three will reveal the level of satisfaction after switching to lower cost investing and valuable tips for those considering doing the same.
I believe the following summary is instructive, but it is not a scientific survey. And, while every investor can benefit from learning the basics, switching to lower-cost investing is not necessarily right for everyone. You ultimately have to decide what is best for you.
Some switched to lower-cost investing several years ago, while others are just now making the move. Several said they wish they’d done earlier, but, as one investor noted, low-cost options have only become widely available over the past several years. Given the fear of the unknown, other investors hesitated for years.
Most investors switched to do-it-yourself investing through online brokers, buying stocks and bonds directly or using low-cost index ETFs including “all-in-one” ETFs. Others moved to robo-advisors while some found lower-cost advisors or lower-cost mutual fund providers. Some investors did quite a bit of research before selecting new investment firms, while others switched to a brand name they knew and trusted. A couple found DIY investing to be too much work.
Some supplemented DIY or robo investing by working with a “fee-for-service” advisor to develop a long term financial/retirement plan.
I believe the great majority of advisors are good people, and some do a great job for their clients. But far too many are stuck in a sales culture built on high-cost products. Here are some comments on the effect and impact of making the switch:
“After my advisor quit, I was transferred to the next advisor who, among other things, put me into mutual funds with deferred sales charges [DSC] without informing me. Shortly after, he quit also.”
“I wrote my advisor a letter, asking for a full explanation of costs. I found out my average cost was 2.04%, and I knew then and there I had to try to find a way to invest that would be more profitable for me. My advisor was not too pleased with me wanting to move my money and that was it.”
“Our advisor suggested a higher-risk portfolio of 100% stocks. However, clients had to have $100,000 or more to join ‘The Plan.’ After we [signed on], I started looking at the statements and couldn’t believe the fees were in the 3.5% range. When I showed our advisor the math, he told me they didn’t think about accounts in terms of fees—we should focus on the growth, the quick action of the fund managers to get out of stocks that weren’t meeting their expectations and the managers’ expertise. It amounted to smoke and mirrors.”
As I said above, there are good people in the industry. And those will help make the transition to low-cost investing. Here are some examples of that:
“I decided to pull my money out of mutuals at a big bank. I informed my ‘guy’ that he could help me move funds over to ETFs at his bank’s online brokerage arm or I’d take my money elsewhere. He helped me move the money.”
“Larry, there was no issue with the advisor when I made the switch. I believe they were expecting that it would happen one day, [and it was a] friendly discussion.”
“The financial advisor for my group retirement plan talked me into investing in a mutual fund through him. I realized very quickly how badly my investment was actually doing. Not only were the fees extremely high—2.5% MER—but the asset allocation was not what I needed. Once I was comfortable with the idea of DIY investing, I requested all my funds be transferred over to an online broker. He told me he appreciated me being up front that I was moving my money, and it was a good thing to take control of my own investments.”
The following example provides an illustration of the long-term impact of fees on investment returns. Assume a $100,000 investment generates an average annual compound return of 7% before total annual advisor and fund management charges of 2%. After 30 years, the investment would be worth $432,194. A 30-year investment that produces the same 7% pre-fee return with total charges of 0.65% would be worth $634,052. A 1.35% cost reduction produces more than $200,000 in additional net return for the investor. Fees matter! You can try out your own scenarios here.
Keep an eye out for part two of this series, in which I ask investors to discuss their experiences with the account transfer process, and part three about the overall level of investor satisfaction after switching to lower cost investing and tips for those considering doing the same.
Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing, and an investment advisor with Aligned Capital Partners.