High fees and trailer commissions are going away, kicking and screaming

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.

Summary

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.