The online investment industry has seen tremendous growth over the last decade, in part because of the cost savings it makes available to direct investors.
“The backbone of this industry was really built on lower training commissions,” says Jason Storsley, president and CEO, RBC Direct Investing. “This was where the term ‘discount brokerage’ was coined. For clients who don’t necessarily need or use advice, it’s a much cheaper option in the investment world.”
In exchange for doing their own research, he says, direct investors naturally expect that they’ll be charged lower trade commission. “Certainly that’s the case with stocks. The price competition among online investing firms has been intense over the last three years. Clients are now benefiting from (that competition) with trade commissions as low as $6.95, down 50 per cent from 2005.”
For mutual fund investors, however, fees have not declined at the same rate; managed mutual fund investors pay a fee for advice (embedded in the management expense ratio) whether they work with an advisor or make their own investing decisions. But RBC Direct Investing offers an exception, notes Mr. Storsley; clients who aren’t looking for advice as part of the package are offered fee discounts when purchasing RBC mutual funds.
“We have to keep in mind that online investing, while it may have originally been ideal for very savvy, experienced and active investors, has evolved and become a great place for mutual fund clients who are investing for the long term,” he says.
“Up until a year and a half ago, the cost – or the management expense ratio, which is what you pay to hold a mutual fund – was the same in the advice and online investing channel. So RBC Direct Investing partnered with RBC Asset Management and introduced what’s called Series D funds, exclusive to our clients. The MER is approximately half of what you would pay through your advisor, and that can really add up over time,” says Mr. Storsley.
Using the RBC Canadian Equity Fund as an example, the savings over a 15-year period would be about $12,000 on a $25,000 investment. “We have over 40 Series D RBC mutual funds now available, and the savings can really be quite substantial,” he says.
Whatever you invest in, “The bottom line is that you have to be able to understand what you're getting for the cost, because it is going to come right off of your return,” says Tom Hamza, president of the Investor Education Fund. “Not only do you lose what you paid in that year, but you also have lost all the opportunity in perpetuity. If I pay $100 too much this year, that’s $100 I’m not going to be making money on for the next 25 years.”
For investors who work with advisors, he says, “Finding an advisor who is proactively cost-conscious on your behalf can be one of the best decisions you can make. There are an awful lot of products out there that cost way too much. You can’t focus on cost enough. It can be the quickest way to increase your returns – that’s why you see a lot of people who are starting to consider investing on their own.”
In today’s online environment, direct investing doesn’t mean investing without help. “We have designed a number of different ‘show me’ videos on our site – it’s a fantastic tool for our clients who have some questions around how to get started. The videos navigate you through our website step by step. These are brief, easy-to-use tutorials that will help you be more confident using our site and making investment decisions,” says Mr. Storsley.
Whatever your investing style, it’s essential to track your total portfolio costs over time, says Mr. Hamza. “It’s absolutely imperative to take a look at how much you’re paying. That means adding up your transaction fees, understanding how much you’ve paid for things like MERs and any other costs that you might have incurred. It is a really fruitful exercise.”
Online tools enables easy cost calculation
“When investors come onto our online education site,” says Tom Hamza, president of InvestorEd.ca, “they're surprised at two things: how easy it is to navigate and how much free information is available at their fingertips.”
Funded by the Ontario Securities Commission InvestorEd.ca also offers a number of tools, calculators and worksheets, including a Mutual Fund Fee Impact Calculator.
Using an example of $25,000 invested with average annual market returns of seven per cent over 25 years, the calculator reveals that just a one per cent difference in costs (the difference between a three per cent MER and a two per cent MER) would reduce returns by more than $18,000. A two per cent difference in costs would reduce returns by more than $40,000.
“If you have a mutual-fund-based portfolio, it’s absolutely imperative to take a look at how much you’re paying,” says Mr. Hamza.
