Q. My RRSP and TFSA are invested in mutual funds with MERs of 2% to 2.4%. Should I be looking at investing in ETFs, which are cheaper? I do have a financial planner who must work with the funds she can access and those include Sentry, Dynamic, CI and BMO. Should I stay with the advisor and use the mutual funds offered or go the ETF route which would likely be cheaper for me? How do I decide? Would sure appreciate your advice.
— Carol A.
A. Carol, if you have a good relationship with your advisor and you’re getting good advice, don’t switch advisors and don’t assume you’ll make more money with a lower-cost investment.
Things are changing in the investment industry and I wouldn’t be surprised if your advisor will be able to provide you with lower cost solutions if they make sense. Ask her.
Keep in mind that the lower cost funds you read about don’t compensate advisors, so advisors charge a fee on top. Once the fee is applied there may not be too much difference in “total” fees.
Fees have been getting a lot of attention in the media lately and it seems the message is “if you pay less money you will make more money”, which sounds logical, but an investment is not a loaf of bread. If I pay less for my bread one week, I know I’ve saved money and I’ll have the same experience with that loaf as I would with the more expensive loaf.
Investments are much harder to compare. Just because you have a lower-cost investment does not mean you’ll get a higher return. Yes, it is more probable you’ll get a higher return but it’s not a sure thing, especially in the short term.
If you have mutual funds with deferred sales charges (DSC) and are thinking of paying the DSC to get out and switch to a fund with a lower fee, don’t do it. There’s no way that anyone can say for sure that over the next five to six years a lower-fee fund will outperform because the time period is just too short.
Here’s an article on a neat study you may like. In simple terms, the researchers modeled one talented investment manager against 20 untalented managers. They wanted to see how many years it would take before the talented manager’s returns would beat all of the untalented managers’ returns. Here are the results, after:
- After 5 years – the talented manager beat only 14% of the untalented managers
- After 10 years – the talented manager beat only 36% of the untalented managers
- After 15 years – the talented manager beat only 55% of the untalented managers
- After 38 years – there was a 99% probability that the talented manager beat all untalented managers.
Now, the study didn’t relate directly to fees. However, I can’t help but think that when a fund manager is on a lucky streak they’ll overcome their fees, and this is why in the short term a lower cost fund may or may not out-perform.
My view on this is to find an investment philosophy you believe in and will stick with, and then find the lower-cost funds that follow that philosophy. Focus on your lifestyle and tax planning because you have a greater ability to do something about those things than you do investment returns.
In the end, the best way to decide if you should stick with your advisor or not may be to talk to another advisor that deals with low-cost funds and find out what your total cost will be to work with that advisor. Once you know that then you can decide if the price difference is worth leaving our current advisor or not. I hope this helps.
Allan Norman, M.Sc., CFP, CIM, Atlantis Financial/IPC Investment Corp
*This commentary is provided as a general source of information and is intended for Canadian residents only. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation.
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