How and why to ditch your expensive mutual funds
When it comes to investing, you often get what you don’t pay for.
That means you should own expensive mutual fund products at your peril. Consider how and why to ditch your expensive mutual funds here.
How and why to ditch your expensive mutual funds – my financial awakening
I write about personal finance and investing often – heck I have this site you’re reading (!) – and I’ve been blogging for almost 10 years now.
But I wasn’t always informed about how high fees can kill portfolio values over time. Until I dug deeper.
For those that have not been following my journey on this site, throughout my 20s and into my early 30s, I invested my hard-earned money using primarily a couple of big bank mutual funds – inside my tax-deferred Registered Retirement Savings Plan (RRSP).
Savvy investors already know the RRSP is a tax-deferred investment account, it does not shield you from taxation when you withdraw money from it.
I didn’t really monitor the performance of these big bank mutual funds until the 2008-2009 financial crisis. When the sky seems to be falling, everyone starts to take notice….
It was during this 2008-2009 financial crisis, that I started asking some serious questions about the performance of my portfolio and what “advice” I was getting from owning these fund products in my portfolio:
- What is this 2% management fee or MER (management expense ratio) for? Who gets paid and why are they getting paid this money? Is this fee per fund?
- Why is my portfolio going down so much when I own a balanced fund? Aren’t bonds supposed to protect me from equity calamity?
- Why do I not get any advice for my fund or this portfolio? I thought this was included in my fund fee anyhow?
- And the list goes on….
Needless to say years ago I was confused, frustrated and downright concerned about my financial well-being.
Should investing really be this hard?
Not all mutual funds are bad funds
No doubt some of my financial immaturity caused me to sabotage my portfolio early on, but all was not lost. My portfolio was growing over the years thanks to a disciplined saving and investing plan. I happened to own modest products that avoided huge risk. I also learned that all mutual funds weren’t evil.
In fact, many mutual funds provide many benefits to investors:
- Mutual funds can provide instant diversification. Many people don’t have the cash to invest individually in a large number of companies/stocks – so a mutual fund allows investors to own positions in a bunch of companies. If a few of these companies don’t do well, no problem, the rest in the fund should offset poor performers.
- Mutual funds can provide built-in professional money management services. Many people don’t have the time, energy or desire to research good stocks, when to buy them, where to hold them, etc. so professionally managed money helps people in this regard. Time has always been precious in our busy world.
- Mutual funds can provide liquidity. Many people, probably everyone at some point, invariably find themselves in some financial emergency and need money for something. Shares of mutual funds can be easily sold and you can get access to the cash; especially if you kept your mutual funds outside an RRSP where tax-deferred RRSP issues don’t exist.
- Some mutual funds can be rather inexpensive to buy. No-load mutual funds exist. These funds don’t charge any fees to buy or sell fund units but they do have operating expenses.
…Just the high fee funds are BAD mutual funds!
Is any 2% fee considered high? Doesn’t sound like much does it?
It’s not really high to answer my own questions, relative to a one-time expense or relative to a small value or purchase.
- 2% of $100 is $2.
- 2% of $1,000 is $20.
- 2% of $10,000 is $200.
But let’s consider the damage of 2% fees with larger values and time involved. Consider this the destruction of value, a very evil and annoying cousin to the magic of compounding.
Example 1 – you invested $10,000 in your 20s but you got busy with kids. Left alone, over 20 years, your 2% fee cost you thousands more in fees versus better alternatives.
Example 2 – you invested $50,000 throughout your 20s but you got busy travelling abroad. Left alone, over 20 years, your 2% fee cost you tens of thousands in fees.
Example 3 – you invested $200,000 throughout your 20s and 30s (awesome work by the way) but you got busy buying a house, with kids, and changing jobs for the next few decades. Left alone, over 20 years, your 2% fee cost you a whopping $125,000+ in fees.
Images courtesy of InvestRight.org (BC Securities Commission) – free calculators are on my Helpful Sites page.
I hope I’ve made my case with these simple examples.
I would think you’d much rather have thousands, tens of thousands or hundreds of thousands of dollars in your back pocket than giving it unknowingly to someone else!?
My own switch – from expensive to lower cost fund products (and wealthier for it!)
Most people know what they know.
Some people know what they don’t know.
But we’re all flawed because we don’t know, what we don’t know.
For years, this was me when it came to understanding financial costs. I was invested in expensive mutual fund products – but I saw the light eventually.
I began my journey out of costly financial products in the year 2000, if not a bit earlier.
I’ve never looked back…
Years ago, I moved out of high-priced mutual funds by doing the following things:
- I sold all my mutual funds and decided to buy initially broad market Canadian ETF XIU from iShares.
- At the time, because I believed I still needed some bonds in my portfolio to save myself from myself, I bought a Canadian bond ETF XBB. You can see an early post on this subject here.
- I researched U.S. stocks since I know I needed to diversify. I now own some U.S. stocks and U.S.-listed ETFs.
- At the same time I also started buying individual stocks. I figured I would own the same companies that top mutual funds own. Enbridge was one of my very first stocks to own. I still hold that company today…
Thanks to this blog, as a financial diary, fans of this site can now read what I own and have learned over the years on these subjects:
Dividends – In some cases I’ve decided and continue to own the same stocks the big mutual funds own. I’m a huge fan of dividend income because of it.
Indexing – I’ve learned about the principles of indexing – and you can too!
ETFs – While learning about indexing, I’ve also learned some ETFs ride the coattails of stock market returns.
Retirement – I’ve learned that other people, including retirees, have struggled with the same concepts I have. Yet over time, they’ve also dug themselves out of accepting higher cost products as a way to invest – and built some wealthy portfolios in the process. Experiences can be a great teacher, including those from others!
What you can do about your high-cost funds?
Ultimately how you invest and what fees you wish to pay for as you invest is totally up to you.
But if you’re stuck and looking for some help – these are some options that can help you beyond my site.
Option 1 – Build your own indexed fund portfolio
Consider learning about and opening a self-directing investing account! This way, you can buy your own index funds!
(An index fund can track a stock or bond market – striving to deliver market returns less a minuscule money management fees. You can easily get some of the best, most diversified, stock market index products for less than the 0.25% in fees I highlighted above.)
Another popular set of funds are TD’s e-Series funds – do a quick Google to find out what they are. All those TD efunds charge less than 0.50%.
Option 2 – Invest with a robo-advisor
Don’t what to run your own direct investing account, consider use of a robo-advisor. I actually have a partnership with one of Canada’s best in this area – although no obligation! Do what’s best for you!
While a traditional financial advisor might change you 1% or more in money management fees per year, these automated solutions have driven down those costs dramatically! The best thing with these solutions, while the software does all the re-balancing for you, you can still talk to a real person about your financial goals at any time.
Once your portfolio of low-cost funds is established with the robo-advisor, all you really need to do is to make your regular contributions and the robo-advisor will automatically/robotically allocate the right amount of cash to your investments.
Basically, until you’re ready to invest alone OR should you never want to invest alone – Robo-Advisors can help train your investing brain.
Option 3 – Own an all-in-one fund
Thanks to the dawn of these awesome all-in-one funds, you can invest easier and better than ever before!
I’ve identified almost a dozen, leading, low-cost ETFs to consider owning here.
How and why to ditch your expensive mutual funds summary
Life anything in life, you don’t know what you don’t know – but via this blog when it comes to personal finance and investing – at least you have some help.
I’m not a perfect investor.
I’ve made financial mistakes and I will probably make more.
But over time, my poor investing decisions are getting smaller and less frequent. That means more of the money I have invested is working harder for me every year – so I don’t have to work someday.
I hope you will have the same financial options in your future too. Thanks for being a fan.
Interesting article. I am probably in the group that is not quite aware what fees are being charged for the various funds in several institutions that we own. Indeed, we changed investors based on a personality issue and moved these Mutual Funds to Segregated Funds. When getting a little sales pitch/financial advice from TDWealth, it was indicated these would be expensive to move under the green umbrella. I don’t see anything on your site about these funds – any thoughts? It’s a little daunting to go at it alone based on time and knowledge, but the challenge of lowering management fees would be a nice bonus. Good writing and good advice. Many thanks.
I would need to know what the funds are to do a bit more research but generally speaking segregated funds are high fee products. I personally believe there are far better ways to invest than those. If you wanted to stay within the TD family, consider TD efunds. With 3-4 funds you have a diversified portfolio at a fraction of the cost and likely far better returns.
Thanks for being a fan,
It was shocking to see what I’m paying for mutual fund fees . What’s your opinion on Mortgage Investment Corporations (MIC) ?
Because they accept higher risk loans they are higher risk stocks. I personally don’t own any and I don’t intend to.
All the best Arlene!
Thank you RBull,
I wish I’ve done it sooner but hey I already saved over 8k in two years only isn’t that crazy ? I read some posts from time to time how investors are worried about doing diy investing, worried that they might mess up but from my experience as long as you won’t touch it when markets are down you’ll be laughing ,after i liquidated all my mutual funds from td i reinvested it all the money back in less then 10 minutes using a calculator and the mobile td app i did it on my lunch break at work 🙂 that simple and now i see my money growing for 90% less fees then before .
Kudos to this website and many many others and for me kudos for the late Jack bogle as he was a true genius and honest man who helped millions and I’m one of them .
Well put – I would be more concerned about losing $8K to fees (or more like many investors have) than moving from some pricey mutual funds into lower cost ETFs. Congrats on your move Gus – as you say – as long as you can ride out terrible markets with an appropriate risk allocation you should be rewarded long term.
All the best,
Hello Mark !
excellent article as usual , and i dealt with this for so many years but i never noticed or actually paid attention to fees maybe because my attention was all on real estate until i watched a youtube video by the late Jack bogle and then Dan bortolotti’s site but still wasn’t convinced till i got my TD statement for my mutual funds and it states that i paid 4600$ in fees for that year it shocked me because that’s my hard earning money i’m paying for some one who meets with me once a year for about 30 minutes , anyways i switched to TDDI and i built a portfolio of low cost index etfs that saves me more then 4k a year ( that’s a yearly family vacation :)) and what i love about it is the transparency because now i know when and how much i will get every month in dividends.
so yeah live and learn and it’s never to late 🙂
Wow, that’s a big number in fees – per year.
Like RBull mentioned in a comment, I think unless folks consider putting some of their money into a suitcase, and giving it to someone else – they really don’t think about financial fees.
There are certainly GREAT reasons to work with fee-only advisors, Robo-Advisors, etc. but blindly paying 2% (or more) in financial fees without knowing it, without getting value for money, etc. is not a good use of money. Live and learn. I did, hence this post.
Thanks for sharing.
Good for you on discovering that and doing a big course correction.
Mark, thank you, great post. I’m moving from investors group this year into my own directed Questrade account. Im a little worried, but questrade have been excellent in helping me not mess everything up so far.
I managed to buy a small amount of VGRO in a self directed RRSP account without going bankrupt by mistake or having a heart attack from the stress.
I also read your post about overseas withholding taxes, but that’s not my immediate concern. Those 2% fees are. One step at a time!
Ha, that’s great! VGRO is a very good, low-cost, growth-oriented fund. No headaches to worry about just keep adding for years and years and years on end!
One step but a very good step!
I was actually a little bit in love with my TDb902 and TDB 900. I have one of these mutual funds in my sons RDSP and initially thought: most of the RDSP money is government money anyway. But you got me, I’m researching ETF’s now. Hoping to find one that is close to my TD mutual funds
I think TDB902 is the U.S e-fund by TD? That’s a good product with MER around 0.35% I recall – FAR better than paying 2% like I was many years ago.
I think TDB900 is the CDN e-fund by TD? Again, a good lower cost alternative with MER around 0.33% I believe.
This article is not to say TD e-funds are not good products or all ETFs are good products but rather, fees matter when it comes to value for money (re: any advice if you’re paying for it) and fund performance.
Thanks for being a fan,
I’ve had this conversation with some people I know paying a lot in fees.
Imagine you have $1M (or pick a number) in investment assets, and you’re paying 2% (pick a number). Now think if you paid those fees directly in cash from your bank account at the end of the year, rather than having them more opaquely taken by the fund company before you see your return. You go to the bank and get 20K in cash and stuff it into a big briefcase or suitcase and take it to your advisor. That’s buys a lot of lifestyle or pays a lot of bills vs. what most people are receiving in return.
2% is a small number but if you have a sizable portfolio that number becomes instantly rather large doesn’t it? Thanks for your comment as always.
Indeed. Thinking in terms of what that would buy puts it in better perspective. It’s incredibly important to consider the consequences over a long time, and especially if market returns as generally expected are not as strong as in the past. The fee continues regardless of whether you have down years or low returns of a few percent.
Been there done that.
Sadly, fees are forever!!
Unless you pull the plug and move on to much cheaper options.
Can’t imagine paying over 2% on all of our assets! Ouch!
My overall cost MER/trading etc are approx. .15%. That I can live with!
The calculator in your example must assume both funds contain the same holdings because it only allows for one entry for average annual return. If similar index-type funds are compared there is likely no need for a separate return entry but as we all know, or should know, most actively managed funds strive to outperform their fund classification so their holdings are often dissimilar to the index holdings. A few funds, like the Mawer offerings, actually outperform the indexes on an almost regular basis. To be more useful the calculator should allow for two separate entries for “Average Annual Return” like is done for “Fee”.
You got it Bernie: “…most actively managed funds strive to outperform their fund classification…” / benchmark.
On the subject of Mawer – agreed – not all funds are evil. In fact, I recall in a comment below that the Mawer Balanced Fund is a star!
Also, I have another link to another calculator should you and others wish to use it.
It’s also posted on my Helpful Sites page:
Thanks for your comment!
Monday, March 11, 2019, 11:08 a.m.
Mark, just wondering if you can answer this question of mine.
I like to determine the total fees and net return for each individual asset (mutual fund/ETF) in my portfolio for 2018.
From my brokerage company on an annual basis I get (CRM2 statement) a total portfolio “money market return %” and a “net investment return $”, but what I want is this same data but for each asset (if possible) in my portfolio.
ex. I have a TD Dividend Fund (756) and for that fund there may have been monies deducted or added, in 2018 etc. and thus for Dec. 31/2018 I would like to know the money market return (%) and net investment return $.
I cannot seemed to get that data from my brokerage firm (not TD) nor from TD Asset Management Client services.
Any suggestions on how I approach this next?
I can’t offer direct advice on fees for many reasons but for a rough estimate, I would use the fund’s MER x total value of the fund for your yearly operating costs. There are more details beyond that though:
For example, say you own TD fund 756. A-series (Advisor series)
FYI – “A” class funds are those that may charge a front-end sales charge. When you buy Class A shares with a front-end sales charge, a portion of your dollars is not invested. Class A shares may impose an asset-based sales charge (often 0.25 percent per year), but it generally is lower than the charge imposed by the other classes (often 1 percent per year for B and C shares).
MER for TD Fund 756 = 2.06%
Say you have $25,000 invested in that fund. Each year then, you are paying ~ $25,000 x 0.0206 = $515 per year.
Unfortunately many brokerages may not be forthcoming about the charges you see, in actual dollars, because it might cause investors to run for the hills and buy different products 🙂
Also, you should know any returns posted for your funds, ETFs, are AFTER fees have been accounted for.
I hope this helped?
Monday, March 11, 2019, 6:24 p.m.
Thanks for the reply and helpful information Mark.
Good post and summary.
I can’t ever see myself going on my own (too busy and research is a bit daunting at times. Maybe when I’m semi-retired, who knows?) so I do a bit of hybrid, mutual funds advisor and robo-advisor. The unique thing about my financial advisor is that he has set me up with a lot of ETFs and minimal mutual funds effectively keeping my fees low (my average is about 0.9%) while still getting valuable advice from him. I once asked him why he was doing that and he said, “why not? If it means saving my client some money while I will still have some income coming in to make a living, I can help them generate more income especially if they’re not comfortable investing on their own. Even more so with the decline in pensions out there.” He’s a rare one, I know.
I think you’re getting value for money KC (re: guidance to stay the course, manage your risk, keep investments tax-efficient, re-balancing help, etc.) then that’s great. I’m ALL for that.
However, paying 2% in fees like I did without any value for money or even knowing about embedded commissions is not smart. Been there, done that, learned!
All the best,