If you bought mutual funds from your bank, you're probably paying more in fees that you realize. And you don't need to.
La mer is french for the sea.
The sea is a deep and scary and mysterious and dark and wet place. And there’s lot of weird fucking fish down there that, if you were to look them in the eye, you wouldn’t sleep again.
Like this guy:
But this post is not about la mer, it is about the MER or Management Expense Ratio.
It’s an investing thing. And it's just as scary.
I know, I know. Boring. But read this anyway. Especially if you’re lazy because I’m going to tell you what to do if you’re lazy. You can even just skip down to that part if you want.
The dirty secret
When you go to your bank to buy mutual funds for your RRSPs or TFSAs, you will be asked a series of invasive questions by the supposedly-helpful person at your bank, who will write it all down and nod. They will recommend a fund for your age and income level and risk tolerance and give you all the documentation on it that they’re required to give you by law.
What they don’t make a big song and dance about is the cost of these investments. If you buy a mutual fund with a 2% MER, you’re paying 2% of your balance to them every year just to manage it. So, if your investments go up 2.5% in a year, you only get 0.5% of that. They keep the rest.
(Note: There are other fees as well sometimes, like trading fees, but they are usually small. MER is the only one I’m talking about for simplicity.)
Even RBC (my bank) explains the downfall of these fees on their website with a helpful chart:
[caption id="attachment_382" align="alignnone" width="323"] From http://funds.rbcgam.com/learning-centre/investing-basics/cost-of-mutual-fund-investing.html[/caption]
That’s good! Kudos to them for explaining the fees and showing that lower fees are better. You should know that ‘cause fees eat your retirement savings like a god damn flesh-eating virus.
Or one of those terrifying fish:
But not so fast with the adulation here. The chart is manipulating you using a classic psychologic trick called anchoring.
The trick from this chart’s point-of-view is to convince you that 1.75% is a good option because it’s the lower of the two. And banks will have mutual funds with fees at both levels in the chart. But what they don’t tell you is that both of these options are pretty damn high.
Well then what’s a good rate you might say?
Well, mine is 0.14%
The reason I have such low fees is because I manage my own portfolio using a passive index strategy.
John Oliver can explain this better than I can. You should really watch this video. Keep in mind that his information is geared towards US folk but the concept is the same in Canada.
In fact, this was the video that got me thinking about writing this post in the first place:
In case you’re wondering why our big banks always have so much money, it’s because I didn’t know stuff like this until a few years ago. All through my 20s I felt proud that I had any sort of retirement investments at all.
I could be ashamed of that fact. But I’m not. The financial system is either accidentally or intentionally designed to be as confusing as possible so people who have actual lives don’t have time to understand it.
Luckily for you, I have no such life.
An alternative for the lazy
Taking over your investments and doing a passive couch-potato index-investing strategy isn’t all that easy even if they do call it couch-potato investing. Once you’re set up though, the hard part is over.
But what if you want the benefits of it without all the work? Well, this has spawned a whole new type of business. A brilliant one, in my opinion. Someone gave the category of companies the stupid name of robo-advisors but ignore that foolishness. There are no robots involved.
What they do is invest your money in index funds using a passive follow-the-market index strategy (just like I do) and charge 0.50% to set it up for you and rebalance as needed. Simple. You pay a little extra to be lazy and still save a buttload from the bank’s actively managed funds.
I love the idea of these companies because investing is a complicated waste of time that many people simply have no interest in, so to speak. And the big banks only want to eat your money. These new companies want to eat your money also, but a lot less of it.
For me, even with my own investing, putting in $10,000 to test it out seemed like a no-brainer because they don't charge fees on the first $10,000. So I did that a couple weeks back. Now I have a nice little app where I watch my investments change:
[caption id="attachment_388" align="alignnone" width="288"] It's down because the UK voters are foolish[/caption]
Don't be scared if it goes down. It's just following the market so it'll go up and down a bunch. Over enough time the growth levels out. That said, in a year or two, I'll compare how they did to how I did and see if their extra fees are worth moving more of my money over.
I chose WealthSimple.
If you want to try WealthSimple, here’s my referral link so we can both get
$25 more money managed without fees. (I really don’t care about the $25 referral though - I care about you not getting raped on fees.)
[Update: after a year, I can say I really like Wealthsimple and I have moved a lot more money over to it. Still waiting to collect more data on return rates, which I will put in a new post, but the ease of Wealthsimple is incredible. They did change their referral commission though.]
The day I started disliking my bank
I’ve been an RBC customer for almost 20 years. The Leo’s Young Savers account I opened at 14 is still the same account I use for my day-to-day banking at 33.
It came with a bank book.
Anyway, I had to drop off some paperwork at a branch a while back for my investing and they spent a significant effort trying to talk me out of managing my own money.
They said things like, “We have secret products we don’t advertise for people like you.” and “Do you really want to be responsible for your own retirement accounts?”
These were hard-sell and scare tactics so they could get me into a “product” with higher fees. Had I not spent months doing research, I could easily have caved. They said all the right things to manipulate a person. It took a lot of confidence in what I was doing to keep saying no.
The entire world is designed to get as much money from you as possible. It’s a polite zombie apocalypse.
(I could switch banks but I assume they’re all about the same level of evil. I do like the idea of being with TD Bank though, if only ‘cause I like to say the name like “Titty Bank”.)
Why I wrote this
If you’re a reader of this blog, I want you to be wealthy. And happy. And retire as soon as you are able. So:
1) If you’re not saving for retirement, start that now.
2) If you are, check the MERs on your funds. See what the average is.
3) Regardless of 1) or 2) - if you’re lazy, think about using a robo-advisor like WealthSimple.
4) If you’re not lazy and want to manage your own portfolio, contact me. I’ll send you every resource I have that was written by people a lot smarter than me. And I’ll help you however I can.
And, really, I gotta do something with this new qualification:
[caption id="attachment_390" align="alignnone" width="1000"] My totally legit creds[/caption]
So to summarize, the fees are like this:
Maybe those still don’t sound like a big deal to you. Well, here’s what happens to $100,000 over 20 years assuming a 5% return every year with these different levels of fees.
This graph is of your retirement fund balance - how much money you have. With the 2% fee, look how much less you have! The difference is $65,000! If that’s around your take-home pay, you’d have to work an extra year for every 100k in your retirement fund before you retire. You could take an entire year off just to learn how to invest and still be better off in the long-run.
(There are some obvious flaws in this logic because your retirement fund doesn’t stay fixed but the issue remains even with variable contributions. And you should expect more than 5%, so the fees would be even higher. I chose 5% to show that even conservative-return fees would be significant.)
The world of money is wild.
If only it was as transparent as this guy: