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investor clinic

Last week’s column about the long-term impact of investing costs elicited a lot of feedback, both positive and negative.

I heard from financial advisers who challenged my thesis that high mutual-fund fees will lead to subpar returns, and I got e-mails from investors who agreed with my point and wanted more information on how to cut their investing costs.

I’ll let the advisers have their say first. Then, I’ll offer a few suggestions to investors.

Several advisers pointed out that choosing investments is just one of their roles. A good adviser provides tax advice, helps clients stay the course during periods of market turmoil, offers mortgage and life-insurance guidance and generally keeps people on a path to meeting their financial goals. “A decent adviser is worth the money,” one wrote.

Fair points. A couple of advisers also argued that a management expense ratio (MER) of, say, 2.5 per cent doesn’t necessarily mean a mutual fund will deliver poor returns. That’s also true; there are funds with high MERs that have outperformed the market.

Problem is, these funds are in a very small minority. According to recent data from S&P Dow Jones Indices, 91 per cent of all actively managed Canadian equity mutual funds trailed the S&P/TSX Composite Index for the 10 years ended Dec. 31, 2018. The results for other fund categories, such as U.S. and global equity, were even worse. An adviser trying to pick a winning fund would be facing some very long odds.

What’s more, research has shown that high-cost funds tend to perform worse than low-cost funds. In a recent article, The Wall Street Journal divided all actively managed U.S. large-cap mutual funds into two groups – one with MERs of 1.5 per cent or more and the other with MERs of less than 1.5 per cent. For the 10 years through the third quarter of 2018, the high-fee funds posted an average annual return of 10.61 per cent, compared with 12.26 per cent for low-fee funds. This should not come as a surprise, given that fund returns are reported on an after-fees basis.

There will always be investors who want the guidance of an adviser and don’t mind paying for it, whether it’s through the trailing commissions embedded in mutual funds or via another compensation method. But for investors who want to reduce their investing costs, there are a growing number of options. Here are four to consider.

All-in-one ETFs

Being a cheapskate index investor has never been easier. Thanks to the advent of all-in-one ETFs, investors can get global exposure to a diversified, self-rebalancing portfolio of stocks and bonds with a single purchase. Vanguard Canada offers five “asset allocation” ETFs with varying levels of equity exposure (VCIP, VCNS, VBAL, VGRO and VEQT), all with MERs of 0.25 per cent. Bank of Montreal (ZCON, ZBAL, ZGRO) and iShares (XBAL, XGRO) recently introduced similar one-stop ETFs. The actual MERs for these BMO and iShares products are not yet available but will likely be about 0.2 per cent.

Low-cost mutual funds

Don’t want to pay high fund fees but still want an active manager at the helm? Companies such as Mawer Investment Management, Steadyhand Investment Funds and Leith Wheeler Investment Counsel don’t pay trailer fees, which allows them to keep their MERs low – generally between 1 per cent and 2 per cent (some funds are even lower). Another low-cost option are D series funds, which have a reduced trailer commission and are aimed at do-it-yourself investors who use a discount broker.


Robo-advisers design and manage a portfolio of ETFs to suit your investing goals and risk tolerance. These platforms are more expensive than an all-in-one ETF. Wealthsimple, for instance, charges 0.5 per cent for deposits up to $99,999, and 0.4 per cent when total deposits across accounts reach $100,000 or more. This is on top of the MER of about 0.2 per cent, on average, charged by the ETFs. But many robo-advisers also provide financial planning, tax advice and other perks that typically increase with the level of assets, so those extra costs are buying additional service.

Individual stocks

Managing a portfolio of individual stocks will give you complete control over your investments – and cut your costs to the bone. You’ll pay a commission (usually $9.99 or less) to buy or sell stocks, but there are no other continuing fees. It’s not for everyone: If you’re prone to gambling on speculative ventures or worry you’ll panic and sell when markets take a tumble, owning individual stocks is probably not for you. But if you have the knowledge to choose companies prudently and can stay the course, it can pay big rewards.

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