Slowly but surely, those who are preaching the low MER fees Gospel (and I will proudly number myself among the faithful) are winning the battle for the hearts and minds of Canadian investors. Despite the fact that we still pay the highest mutual fund fees in the world (2.1% on average), we are slowly becoming aware of the fact that fees and commissions on financial products can quickly eat away at the investment returns you need in order reap the full benefits of compounding. The evidence that this trend is starting to get noticed is the recent news that Investors Group Inc. (a subsidiary of the massive holding company Power Financial Corp) has recently slashed its MER fees on its line of mutual funds in a bid to stay competitive. With robo advisors such as Wealthsimple becoming more and more popular, I'm willing to get that the traditional channels of investment management is starting to feel the pinch.
There is Plenty of Fat to Cut
Now no matter how much Investors Group cuts their fees, I’m fairly certain I will never recommend their line of mutual funds. I love these quotes by Investor Group’s CEO, Murray Taylor. “There has been greater consciousness around the fee questions,” as well as, “Our strategy is to get our fees more into the middle of the category as opposed to the edges.” So basically you still want to gouge your clients, just not so much that you stand out from the rest of your mutual fund-selling brethren? The arrogance of these people is unbelievable. They repeatedly send out their slick-talking salesman and take advantage of people who just, “want to buy RRSPs,” by throwing buzzwords like “diversification” and “professional money manager” at them.
Now Investors Group and other people in the mutual fund industry will tell you that when you buy a mutual fund, your MER fees pay for the advice and services you are receiving as well. Please do not listen to this garbage. Any information you need on personal finance and investment planning is readily available online these days, if not on this site than one of the ones that we feature on a weekly basis. For most people, a very simple plan that focuses on the long-term is all that is needed. What definitely IS NOT needed, is the latest mutual fund on the market that your “expert” financial advisor is pushing. Check out my eBook for a full run down on this debate, but to summarize, the vast majority of mutual funds do not beat the market average. In fact, after their fees are calculated in, less than 1% of mutual funds beat the market average that you can guarantee yourself through ETFs and/or index funds.
A Case Study: Fancy Mutual Fund vs Simple ETF
Let’s take a look at the massive ($13 billion in assets) Investors Dividend Fund for more an example on why the mutual fund industry is banking on us Canadians not waking up to reality. Here are the main holdings of the fund as of February, 2012 (the latest update on the Investors Group website):
- Royal Bank of Canada
- Bank of Nova Scotia
- Bank of Montreal
- TELUS Corp.
- TransCanada Corp.
- CI Financial
- Power Financial Corp.
- Husky Energy
- Manulife Financial
- Sun Life Financial Inc.
Now the “diversified” yield of this fund looks pretty decent at 3.7%. That is until we take a closer look at these claims of diversification and true investment yield. This fund is horribly unbalanced, with over 50% of the holdings in Canada’s financial sector. Obviously the banks are a great place to look for income-producing companies, but don’t preach diversification if you’re really a collection of financial companies with a few other Canadian blue chips thrown in. Now that 3.7% yield that the fund produces every year would be nice, if it wasn’t held back by an obscene MER fee of 2.7%! That effectively means that the overall yield (or money generated for you) is 1% + the meagre capital gains you will see as a result of buying mature companies. I sure hope you’re getting some great investment advice and handholding from IG if they’re going to charge you that much!
Let’s compare that fund with my favourite way to get exposure into Canadian equities – the iShares S&P TSX 60 ETF. Here are the main holdings (which are not as concentrated either):
- ROYAL BANK OF CANADA
- TORONTO-DOMINION BANK
- BANK OF NOVA SCOTIA
- SUNCOR ENERGY INC.
- BARRICK GOLD CORP.
- CANADIAN NATIONAL RAILWAY CO.
- BANK OF MONTREAL
- POTASH CORP. OF SASKATCHEWAN INC.
- CANADIAN NATURAL RESOURCES LTD.
- BCE INC.
This extremely basic ETF that allows you to track Canada’s main index has a decent dividend yield of 2.9%. While this may not stack up to the 3.7% figure above, when you calculate in the very reasonable .17% MER fee, you’re laughing! The bottom line is that this basic ETF will produce an overall yield that is more than 250% higher than that of a huge mutual fund that purports to be specialized in dividend stocks!
While it is encouraging to see IG scale back their fees, I still wouldn’t recommend any of their products. Young, has a more in-depth commentary on her personal experiences with the company here.