High fees and trailer commissions are going away, kicking and screaming
Readers of this blog will know for many years now, I’ve been a hybrid investor. I own a number of dividend paying stocks for income and I own a few low-cost Exchange Traded Funds (ETFs) for long-term growth. I follow this approach for many reasons however one big one is I save money on management fees.
That’s not great news for financial firms in general. They want my money and some of them would LOVE to charge me high fees to own their products. No thank you. But what about you? Read on.
Canadians are slowly catching on. They realize high fees kill portfolio values over time. This means the lower and longer you can keep your financial costs down to run your portfolio, the wealthier you can be.
Ken Kivenko has been fighting for Canadian investors for decades. He is the President of Kenmar Associates, a firm dedicated to investor protection and education. His firm maintains CanadianFundWatch.com and publishes reports to assist retail investors in preventing broker shenanigans and salesperson malfeasance. Ken is a regular contributor to Canadian MoneySaver and other national publications.
Ken was on this site last year – an article I encourage you to read. I reached out to Ken recently to talk about these messy (and costly) trailer commissions and what Canadians’ can do about them.
Thanks again for the time Ken.
Happy to be back, Mark.
Ken, some Canadians don’t know what they don’t know. Can you explain what trailer commissions are in plain language?
First, let’s start with this – Canada continues to have some of the highest mutual fund fees in the developed world. Unfortunately many Canadians just don’t care – but they should – since high fees are enemies for your portfolio and that means less money for you for retirement.
Many Canadians have probably heard about Management Expense Ratios or MERs for short, when buying funds. You did a post about that some time ago.
Trailer commissions are a nasty part of MER. These are basically commissions paid out to the investment advisors who sold the fund product(s) to investors. That should be a big flag to you as an investor! If someone’s compensation depends on your purchase of a particular fund, then that’s a conflict of interest. The financial product someone is selling you might not be in your best interest. It can pad the salesperson’s bank account though.
Ken, what’s the big issue with these trailer commissions or just high fund fees in general? What should Canadians know to make better financial decisions?
Well, beyond the conflict of interest – which is a huge issue – another big issue is less money in your bank account. I’ve seen you write about this on your site before and it’s true: the money you pay in fees is money you’ll never see again.
This means you’ll need to count on successful, active money management over time to overcome the fees you pay including those nasty trailer commissions. Good luck with that.
Consider this brief example for some perspective:
- Two (2) funds, $100,000, invested for 25 years, $5,000 invested annually.
- Fund 1 – Sprott Asset Management’s Balanced Class A Fund (MER = 2.80%)
- Fund 2 – BMO’s Balanced ETF Portfolio (MER = 0.61%)
The money lost to fees and/or fees that put hopes on active money management decisions to best the market is startling:
Are there better funds to buy and hold than Sprott’s balanced product? Yes. Are there worse funds to own? Absolutely.
Could you own an even lower BMO portfolio fund or other low-cost funds from BMO and other providers? Sure you can.
My take home message to you with this simple example is this: the lower and longer you can keep your money management fees, the better it can be for you and your portfolio.
Consider low-cost funds that are both diversified and have a good established track record when in doubt.
(To compare mutual funds or ETFs, check out this excellent mutual fund fee calculator here.) I have lots of other financial tools on my Helpful Sites page here.
Is this “compounding” in reverse?
You got it Mark.
High fund fees and the quest for market out-performance to those investors paying those fees can have HUGE and sadly negative impacts for long-term investors. What people don’t realize is that 2.8% per year or even 1.9% per year really, really adds up.
High fund fees, including those nasty trailer commissions rewarding mutual fund salespeople, make other people wealthy – not you.
To avoid high fees, I suggest do-it-yourself (DIY) investors slash their investing costs in a few ways:
- Choose an Exchange Traded Fund (ETF) or a group of ETFs that are both low-cost and diversified.
Check out my page on ETFs here including some of the lowest cost products in the financial industry.
- Use a robo-advisor or an automated portfolio service to choose and continually manage ETFs that are low-cost and diversified. This will also take your emotions out of investing and make you wealthier for it.
I have partnerships with both a leading robo-advisor firm (ModernAdvisor) and BMO’s SmartFolio that can have you hundreds if not thousands of investing dollars on this page here.
- Go with one simple all-in-one investing solutions that are available from a variety of firms, to lower your fees to a far more reasonable amount. Mark, I think the choices you have here are far better than higher-cost alternatives.
It’s been many months since you’ve been on my site. What one or two nuggets of financial advice do you have for Canadians investing in 2018?
If you want to keep more of your hard-earned money, you have to stop being ignorant about fund costs and trailer fees and salespeople pushing products that aren’t in your best interests. Make 2018 the year you figure that out!
Don’t let a commission-based salesperson make your financial decisions. I feel if you don’t control your financial destiny someone else will.
For 2018 in particular, I would say this to your readership:
- Carefully look at your investing costs and ask yourself what benefits you are receiving from them. By now, all investors should be receiving annual charges and compensation statements. Read these statements to see what value you’re getting for your money.
- Learn the basics of behavioural finance – apply those learnings to your financial life.
- If you need a financial advisor ensure you engage one with the necessary skill set and a high ethical standard not driven by any compensation incentives. Specifically, find a financial professional you can trust that is agnostic on the financial products you own and instead, focuses on your needs and objectives.
Thanks for this Ken and being a big fan of the site.
This latest interview with Ken Kivenko reinforces a similar theme that Ken and I are passionate about – managing your money effectively and efficiently is not only an important skill but it’s essential for financial well-being.
Have you ditched high fees from your portfolio? If you are still paying large fees, are you getting your money’s worth? Do you even know? Let me know in a comment below. Thanks for reading.
Excellent post Mark. I wholeheartedly agree on expense ratio kills the fun of compounding and retaining value. I love low cost ETFs specially from Vangaurd and will like to increase my holdings on some of those ETFs.
My first time here, thoroughly enjoyed the post.
Thanks for taking time to check out the site. Good luck to you as well!
Thank you so much for writing this Mark. After just writing our annual cheque of $420 to our financial advisor (plus any additional fees he makes!) we have decided that 2018 is our year to change things up. I’m just so nervous about moving away. I’d love to be more DIY but with two young children, studying and working, both time (and money!) are tight, and I’m not sure I’d trust my own advice. I’m not even sure of the first step to take in order to move away from having a financial advisor take care of everything. I just know I need to take one because we’re working really hard to earn money and save money, and don’t feel we’re realising the full benefit of it. If you have any thoughts on how we might take that first step away from handing someone else a good chunk of our money I’d really appreciate it. Thanks so much.
Let me think about an article on that Olivia. I know taking that big leap is not easy. I’ve been there – moving away from high cost products, not knowing how and why my portfolio behaved the way it does. I have much more to learn but I’ve also been proud of how far I’ve come.
Give me some time to mull that over. In the meantime, have you considered a robo-advisor? I have a partnership with ModernAdvisor. There is no obligation to go with them but it might be worth thinking about. You get low cost products and professional advice at the same time.
You can also consider an all-in-one solution in my post. There are some great balanced products out there that charge about 1% or so. If you’ve been paying (I don’t know that you have??) 1.5% or more, it might be a great option.
Again, I’ll give things some thought. Good luck to you and thanks for being a fan.
Thanks so much for taking the time to reply Mark, I really appreciate it (and am looking forward to your article on the topic of next steps!) I’m going to look into the MER that we’re paying and make sure I’m clear on it. I have also just seen the annual trailing fees that we’re paying for just one of our RRSPs and it’s almost $500. That seems like a lot of money to me! I think it’s time to start researching out next options and will make sure I look into robo-advisors as part of that. Thanks so much for the advice so far.
If you’re getting value for your fees Olivia, that’s great. If not, and your fees are rather high, those will certainly harm your portfolio.
Consider playing with the mutual fund fee calculator in linked to in the article and see what your funds are doing, costing, compared to some lower cost ETFs I have listed here on this page. That will likely really highlight your opportunity costs and money going down the drain:
Try using these against your funds:
Canadian equity – XIU or XIC or VCN or ZCN (inside TFSA or RRSP). Those funds are sold by iShares and Vanguard Canada and BMO.
Oh my goodness, I’ve just looked into it and our MER is 2.5%, plus $420 annual fee for advice, plus trailer fees. It’s time to make a move, I think.
It’s very likely your trailer fees are paid out of the MER and are not being double counted.It is unconscionable that they charge you $420 on top – the 2.5% MER includes a 1% fee to the advisor and his/her dealer so that is supposed to cover the advice component.
A 2.5% MER is certainly fairly high – what company’s funds do you hold? In addition to Mark’s great suggestions on robo-advisors, take a look at the brand new portfolio products from Vanguard (VGRO) – a single ETF can give you a complete portfolio for an MER of 0.24% – one tenth of what you pay now.
Agreed. It’s not usually a double-dip. Personally, I think anything over 1% in fees these days, given the plethora of investing options and low-cost alternatives is too much money.
My article was to share that insight and provide a few alternatives.
Great point about VGRO, a few offering. Open a discount brokerage self-directed RRSP account and throw every penny into VGRO.
The bond component in the VGRO does not make this product appealing for non-reg. accounts but most investors will struggle to max out both TFSAs and RRSPs in their household.
A solid, low-cost, diversified option. Contribute $500 monthly, religiously, and wake up in 30 years with > $500k for retirement. Pretty good deal.
Thank you so very much to you both, BartBandy and Mark. I will take your advice and start getting clued up on investing so that I can make a timely (and hopefully wise!) move away over the next year. Are there any books you’d personally recommend? Thank you so much!
Gosh, a long list…but here are a few to get started with:
Spending that money and reading some books like these could save you thousands of dollars in poor decisions. Happy reading and let me know if you have more questions.
Ouch. Anything over 2% is high Olivia. I’m paying <1/10th that. To put 2.5% MER in perspective, you’re paying $2,500 every year to own that fund on $100,000 invested. I’m paying $250. After 10 years in that fund, as an example, you’re paying tens of thousands more money than I am to own that fund.
I would highly recommend reading a few investing books, and then, take your time over the next year to make some move decisions. Plan the work, work the plan. Don’t feel rushed. Better to be informed before making any big financial moves. Fees aren’t everything but they are important.
Interesting that there is not an option with No fees. Develop your own portfolio of solid DG stocks over a number of sectors and pay zero fees, saving the $$ to invest and grow your own value not theirs.
Very true and I could have easily discussed your way, largely my way, to get wealthy eventually portfolio.
I think DIY blue-chip dividend growth investing is not for everyone, but I know I’ll write about that tactic as a future article. I have to save some content for future posts!!
Great article guys. The lights are coming on and the tide is turning – ever so slowly!
Thanks Larry! I appreciate the social media support.
My financial advisor is a bit of a hybrid approach. He tries to find the best products for his clients while keeping fees low. 1 fund is unfortunately high in MER but the returns and diversification in this fund far outweighs the cost. Another 2 of my funds are ETFs and MER is quite low. His advice has served me well over the past few years so I’m willing to pay the higher costs for now on that fund. He’s one of the rare ones.
Interesting and good to hear KC. As long as you’re getting value from your advice and fees, that’s great. Fees aren’t bad entirely – but little value for money is.