$29,207.38 In Fees …and she didn’t know. (sad face)

ETFs vs mutual funds Canada

Imagine paying almost $29,207.38 in fees and not even knowing it.

That is what happened to one of my neighbors, let’s call her Kellie.  

Kellie is 51 years old and in 2009, she inherited $250,000 from a family trust.  A few months later, as the money was earning less than 1% in a high-interest savings account, Kellie had the opportunity to attend an investing seminar at Investors Group.  Kellie was charmed by the knowledge the mutual fund representative seemed to have.  He was quite convincing that his firm was an expert in investment management – backing his claims up with charts and the significant assets under management (AUM) of Investors Group.  She didn’t understand all, but she was confident that any money she invested with IG would be well managed.  When she asked about the fees, she was told not to worry, she would not pay any up-front or direct fees for her mutual fund purchases.  

Kelly was relieved to have this taken care of and agreed to purchase: 

  • $125,000 Investors Canadian Large Cap Fund
  • $125,000 Investors Bond Fund 

Recently, Kellie began to notice that her annual returns were a few percentage points lower then the index returns, which were published regularly in the Globe & Mail. 

Unfortunately, her suspicions were right.

The Investors Group mutual funds representative had sold her funds without explaining one little detail: the outrageously high MER fees. Ugh, it makes me so grumpy when advisors do this.

I sat down with her and together we unpacked the fees that she was paying with her current Investors Group portfolio, versus what she could be paying in a similar ETF portfolio, with a similar risk/reward profile.

Here are the 5-year annualized results for both the actual portfolio (IG) and the ETF portfolio (iShares) as of March 2015: 

Investors Group Portfolio

Investors Canadian Large Cap Value Fund (Series C, purchased DSC) 
5 year return: 3.4%
MER: 2.95%
Fees paid over 5 year period: $20,380

Investors Canadian Bond Fund
5 year return: 3.33%
MER: 1.82%
Fees paid over 5 year period: $12,477.10

Total fees paid to Investors Group over 5 year period: $32,857.10

Black Rock iShares Portfolio

iShares S&P/TSX 60 Index ETF
5 year return: 7.06%
MER: 0.17%
Fees paid over a 5 year period: $1,267.80

iShares Canadian Bond Fund
5 year return: 5.71%
MER: 0.33%
Fees paid over a 5 year period: $2,381.92

Total fees paid to Blackrock iShares over the 5 year period: $3,649.72

Well.

The numbers show that Kellie paid an extra $29,207.38 in fees for a mutual fund portfolio that she could have built with ETFs, that would have had an almost identical risk/reward profile.

Even more amazing is how much she would pay if – all things being equal, she held the mutual funds until her retirement at age 66.

Holding the IG portfolio for 20 years, Kellie would pay over $147,000 in fees.

I don’t want this to happen to you!

That’s why I created the Mutual Funds vs. ETFs cheat sheet. It’s a free one-page PDF download (printable!) that will show you the top three differences between ETFs and mutual funds, a sample model portfolio, and 5-year impact of fees. 

Click here to download the FREE cheat sheet.

You can use it as jumping off point to understand the MER fees you are paying now, make some changes if necessary, and save yourself a ton of money! 

Embed

Bank Fees (or, dumb things I do when it is raining)

bank fees TD
Do You Know How Banks Make Money?

Not the little, seemingly harmless ways they make money, but the basic reason, sort of like, why they exist? They lend money. But to lend money, they need money (funny how that works).

This is where you come in.

Here’s a story:

Jenny needs a $100,000 mortgage to buy a house. You have $100,000 that you just received as an inheritance, and you are not ready to invest – you simply want to put in a savings account at the bank.

This is what is going to happen: The bank is going to give you 0.4% interest on your $100,000. The bank is then going to lend your $100,000 to Jenny at 2.9% interest.

After the first year, when they have collected 2.9% from Jenny and paid you 0.4%, the bank has a profit of $2,500 (or 2.5%): $100,000 x 2.9% = $2,900 (received from Jenny), less $100,000 x .4% = $400 (paid to you) = $2,500.

If the bank had $10,000,000 in deposits and had also lent out $10,000,000, the profit to them would be: $250,000. You can see how this could add up, eh?

The above is pretty much the only way banks used to make money. And, (from what I hear) they were quite appreciative of you having money deposited with them, downright thankful even. Like, to the extent that it would have never crossed their minds to charge you to access (your own) money on deposit with them. But then one day, sometime in the last 20 years, someone, somewhere hired a Consultant. And soon it was, “What if we just charge a little for X?,” and, “Couldn’t hurt to charge a small fee for Y… ”

Now, here we are today, grateful for the privilege to pay $14.95 for a debit account.

The point – and I do have one – is that if you are not super careful, auditing your statements every month, in all likelihood you will pay excess fees. Excess being charges over and above any monthly fee you have for a checking account. How do I know this? Because it happens to me, and I should know better.

TD App Last Tuesday I was on my way home from an appointment and wanted to stop to buy garden plants at the Jean Talon market. After I buried my car in the underground parking and made my way to the entrance, I remembered that nowhere at the Jean Talon market do they accept debit or credit cards.

Cash only.

And then it started to rain. Like, crazy, tropical rain storm rain. And I just could not bring myself to get back in my car and drive to find a branch of TD Canada Trust. So I did what I promise myself I will never do, and I made a withdrawal out of an ATM that was not owned by TD Canada Trust.

I knew there was going to be a fee, and I knew it was going to be nasty. But even I could not believe it was $4.00. I had only wanted to withdraw $100, but $4.00 fee on $100 withdrawal is 4%. Do you have any idea how long it would take to earn 4% in a savings account at TD?

Lucky for us, they post this information online:

Interest savings account

Would you like to guess? How long for $100 to earn $4 in interest at 0.1%?

39.3 years.

And lazy-over-here almost gave the bank 4% in 7 seconds, withdrawing from a non-TD ATM. In the end, I gave them their $4 but I withdrew $500, bringing the cost of the fee down to .8%. Yes, it is $4.00 no matter how you calculate it, but mentally I felt better about not paying a 4% fee to access my money. Which, as we learned above, would be 4% over and above the revenue they generate from their primary business model: Lending money.

What Does This Mean For You?

I want you to go back at least three months in your paper or online statements. Go line-by-line and check for any and all fees and charges. Overdraft fees, non-bank ATM fees, excess withdrawal fees, check cashing or certification fees, interest charges, etc. Anything that is a withdrawal from your account that was not made by you. Add them all up. If you find them to be high (i.e. more than $12 – $16), go to the bank and ask if they have an account with a monthly fee that has more included fees applicable to you. 

For example, several years ago I realized that as our lives together were growing, so were the number of our monthly account transactions. The last straw was a month where we paid over $30 in additional transaction fees. Back then, our only option was a $24.95 per month all-inclusive account. Which seems high – but it included a free TD First Class VISA, free cheques (usually $28/box) and unlimited transactions. Also, a free safety-deposit book, no-charge certified cheques and reduced cost U.S. dollar account w/U.S. VISA. However, I looked into our options again just last week, and there is a now a $14.95/monthly account with unlimited transactions. No free cheques but I might have ordered three boxes before I switched. Sh!  I did the math, and by simply paying for what I do use:  Unlimited transactions, AeroPlan VISA, U.S. Dollar account w/VISA, it is a few dollars cheaper per month than the $29.95 (TD raised their all inclusive rate in 2014).  

All of this to say – I am not a huge fan of budgeting, but I am a massive advocate of not squandering money. If you can take even just a little bit of time to figure out where you are wasting money, budgeting becomes not entirely necessary. Bank fees are an incredibly good place to start.  And then? If you find yourself trapped in a produce market in the pouring rain, forced to use a foreign ATM, well – $4.00 is just $4.00, and not a part of a larger, more expensive problem.