After this blogpost on my site, you can retire comfortably with less than $1 million in the bank, a few readers seemed a bit shocked by the money management fees charged by monthly income funds referenced in Gary’s article:
“Interesting “wake-up” point about fees. In the example of investing the principal of $500K in a monthly income fund, and paying $7.500 per year in fees, that’s $625 per month!!!! It would nice if that sum went into my pocket, rather than my advisor’s/the bank’s pocket. But, what is the alternative?”
Another investor rightly pointed out “most income funds don’t have any particularly special investments” so while “they do take care of some of the work for you, but there are funds that hold similar investments with much lower fees. And you can also buy many of those securities directly.”
Absolutely. Let’s take a look at some of the big bank monthly income funds and see if you see a trend.
Fund # 1 – BMO Monthly Income Fund
Fund # 2 – CIBC Monthly Income Fund
Fund # 3 – RBC Monthly Income Fund
Fund # 4 – Scotia Diversified Monthly Income Fund
Fund # 5 – TD Monthly Income Fund
What are your first impressions when you see these funds?
What holdings are the same?
What mix of stocks and bonds do you see?
Here are my quick observations:
- The Management Expense Ratios (MERs) are all over 1%. Using the RBC product as an example, this means a retiree with $100,000 initially invested in this product will pay about $1,200 in fees every year. Not so bad. However, if you hold this product in retirement for 15 years, you’ll pay over $31,000 in money management fees.
- Most of these monthly income funds might yield between 3%-4% per year.
- Most of these monthly income funds are made up of Canadian equities and Canadian bonds, roughly in the ratio of 40-60% equities and 30-50% bonds. The rest of the holdings are largely an irrelevant mix of U.S. equities, mortgage-backed securities, income trusts, cash and more; irrelevant as they relate to your fund’s performance that is.
- Canadian equities can be bought in the form of lower-cost, broad-market Exchange Traded Funds (ETFs) like: XIC, ZCN and VCN to name a few options. The cost is <0.20% in fees. These Canadian equity ETFs and others yield between 2-3% per year.
- Canadian bonds, with a mix of corporate bonds and government bonds can be bought in the form of lower-cost ETFs like: XSB, ZAG and VAB to name a few options. The cost is <0.25% in fees. Many Canadian bond ETFs yield around 2-3% but the yield to maturity is lower than that.
- You could own a “fund of funds” packaged in one ETF. Examples include: XTR, XEI and ZMI. You’re going to have to stomach more risk with these ETFs but your money management fees will be lower.
- You could own some dividend ETFs like: DXM, CDZ, ZDV and VDY. The problem here is a focus on dividend stocks and no fixed-income. Again, at least your fees will be lower and you’ve solved the equity portion.
Using a couple of ETFs you can “unbundle” your monthly income fund. This is especially true if you’re already holding a number of blue-chip dividend paying stocks for the long-run, you hold other broad-market equity products in your portfolio or you’re fortunate to have a fixed-income component such as a workplace pension or government pension. Most diversified portfolios can be built with 4-5 ETFs and no more. There are other income options for retirees (annuities) but that’s another post for another day.
If you’re not ready to DIY invest yet, are worried about this proposition, and you don’t own an online discount brokerage account yet, just park the ideas above for now and wait until you consult these alternatives with a financial professional. A financial professional can re-assess if these alternatives could work for you among others. You’re going to pay these professionals money for this work but I can assure you it will be much less than the $31,000 you’ll pay in money management fees for the next 15 years.