Many of us are becoming more aware of the true costs of delegating the management of our hard-earned retirement savings to “professional” money managers, who may be incentivized to disguise themselves as fiduciaries, only to mislead clients to sell them something like a high-fee mutual fund!
While a 2.8% management expense ratio (MER) on an open-ended, no-load mutual fund may seem insignificant, as there are no upfront costs, the fact of the matter remains that the seemingly ambiguous MER may be large enough to cost you about a third of the future value of your invested principal, as it insidiously eats away at your wealth gradually over time.
Furthermore, such MER fees may also be “talked down” by an unethical mutual fund salesperson. Consequently, a select few rogue “advisors” (or mutual fund salespeople) may try to mislead you by telling you that the fees are “scraping the bottom of the barrel” or they may outright lie to you by telling you the fee is charged on the profits earned in a given year, not on the invested principal itself. In any case, a retired investor with no background in finance or stocks may have no other option but to take the unknowingly corrupt advisor’s word for it.
A vast majority of Canadian mutual funds are based on trailer fees, whereby an “advisor” only receives a commission if they keep a client invested in a certain class of funds. So, for many investors, they may not be getting the “unbiased” financial advice they need to make the optimal investment decision.
Retired investors in particular are the most vulnerable to “poor advice” due to the sheer size of their nest eggs and how much larger the potential commission would be for an advisor who’s compensated through trailer fees.
What are the actual costs of high MERs?
I’m sure you’ve seen Questrade ads on television by now. You know, the ones with tense “talk” that investors have with their advisors.
“That’s 30% of our retirement gone in fees,” a woman says to her advisor, who’s put on the spot and left speechless.
These are the talks that all prospective investors should be having with their advisors, but unfortunately, an overwhelming majority of investors in high-fee mutual funds will not be able to understand the real costs of high-fee actively managed funds until it’s too late.
In the grander scheme of things, most investors who are already in “actively managed” mutual funds will be doomed to underperform the markets. Higher fees don’t necessarily mean you’re getting a better product, nor do they increase your odds of beating the market. On the contrary, the higher your fees will be, the higher your chances are of underperforming the market, because like it or not, you’re paying obscene fees to money managers whether or not they beat the market. Win or lose; you’re still paying the MER, which does not depend on the future performance of a mutual fund under question.
Further, not only will you end up overpaying for sub-par results with active management on average, but active managers will rack up the trades versus that of a passively managed investment vehicle like an index fund. The large number of trades under an actively managed mutual fund will not only cost the investor, but they may pave the way for an uglier tax bill come year-end. Tax inefficiency and high fees? That’s a one-two punch to the gut of retirees who are over-invested in high-fee mutual funds.
Where retirees should be putting their money
Enter Bank of Montreal and its investor-friendly lineup of low-fee ETF products.
Today, BMO has been a wide array of promising ETFs with MERs well below the 1% mark. You can bet take a slice of the REIT sector with BMO Equal Weight REITs Index ETF (TSX:ZRE) and its bountiful 4.6% distribution yield for an affordable 0.61% MER, or you could bet on a one-stop-shop investment with BMO Canadian Dividend ETF (TSX:ZDV) with its 4.36% yield and its modest 0.39% MER.
There are a wide range of easy-to-understand options out there. Know the real cost of what you’re paying, so you can preserve your nest egg and not surrender a piece of it to a manager who may not have your best interests in mind. BMO’s ETFs are a great place to start if you’re a “set-and-forget” is your style.
Stay hungry. Stay Foolish.
- Here's Why Canopy Growth Corp and Aurora Cannabis Stock Are Still Worth Buying in September
- Two New Stock Picks Every Month!
- These Quality Canadian Stocks Are Trading at 52-Week Lows
- Free investor brief: Our 3 top SELL recommendations for 2018
- 2 Top Bank Stocks to Buy and Forget
- A Great Canadian Dividend Stock to Buy and Hold in Your TFSA
Fool contributor Joey Frenette has no position in any of the stocks mentioned.