Fees are a really important factor in investing – more and more TV commercials tell us so. And yet, this messaging has yet to really make its way through to all Canadians. In this article, we’ll explore why so many Canadians are unaware of the costs they incur on their investments, what the impact of these fees can be, and what you can do to lower your fee burden.
Why Canadians Pay So Much in Fees
Because there is so much going on already with the investment process – exploring different types of products for different goals in different types of accounts at different institutions with sometimes very persuasive salespeople – fees can be easily overlooked. This is especially true for those who are new to the world of investing.
In addition to this, those who charge high fees work hard to make sure that you don’t notice. Fees may be presented disingenuously, obscured, or buried in fine print or massive legal documents. Luckily for us, Canada’s financial regulators have also been working hard to ensure fees are more prominently disclosed.
But transparent fee disclosure only solves part of the problem. Some companies and salespeople claim that their higher fees are worth every penny – perhaps you’ve even seen ads telling you as much. But their claims are generally bogus. Investors can generally obtain very similar market exposure in other investment solutions with fees that are a fraction of the high-fee alternatives.
Investors bear the ultimate responsibility to ensure they aren’t unnecessarily paying excessive fees for products or services they could easily obtain for less. And yet, some investors don’t do their homework (as evidenced by the $2 trillion in high-fee mutual funds, for example). Maybe it’s because they think that fees don’t matter.
The Impact of High Fees
The average Canadian contributes about $5,000 each year to their RRSP. After saving and investing for 40 years, as this average Canadian enters retirement, they could have hundreds of thousands of dollars more simply by reducing the fees they paid by 1.5%:
Consider this average Canadian, who is able to save $5,000 per year. If this amount of savings represents 5% to 10% of their gross salary, that means they’re earning a salary of between $50,000 to $100,000 per year. Think about how great it would be for that person – earning a salary of $50k to $100k – to have an extra $362,473 at retirement. That’s a huge deal.
And for a Canadian with a higher-than-average ability to save, this difference could be in the millions:
Let’s think about what this difference means for their retirement lifestyle. For the investor who has an extra $2.2 million as they enter retirement, using the 4% retirement withdrawal rule of thumb, this difference means having an extra $87,000 in retirement income each year! What would you do with an extra $87k every year?!
Three Places to Save on Fees
Now that I have your attention, you’re probably wondering how you can save that 1.5% in fees. There are generally three ways to incur – and therefore save on – fees.
- The easiest thing to do is stay away from high-fee investment products. These include most mutual funds, closed end funds, structured products, and even many ETFs. Many of these products have management fees exceeding 1.00%, and can often even exceed 2.00% or more. While it may seem reasonable to pay something to get market exposure – after all, you’re getting access to the capital markets! – consider that you can get very similar market exposure via any number of index-based ETFs or target date ETFs, at a fraction of the cost.
- Try to keep your money away from institutions that systematically take a fixed cut of your portfolio value each year. For example, there are many RESP plans that absolutely devour investors’ savings, with fees upon fees upon fees. Another factor to consider is trading commissions; a long-term, disciplined investor shouldn’t be trading too often, so it shouldn’t be too large an issue. But if you’re just starting out, consider investing on a platform that has low-to-no trading commissions.
- Finally, if you have a financial advisor, consider whether you really need them. If all they do is park your savings in a handful of index funds or stocks (or worse, in high-fee ETFs, mutual funds, closed end funds, or structured product), and they don’t provide any other value to you, run. They are just doing what you could very easily do yourself. But, if they take the time to consider the uniqueness of your situation and provide customized financial planning advice across all aspects of your financial life, that advisor could very well be more than worth the fees you’re paying them.
The fees that you pay in any given year might not seem extremely meaningful, but they can compound big time in the long run. If you want to really understand their impact, think about how much money you might realistically save and invest over your working life, and try to visualize the extra money you could have in retirement. And remember, most high-fee investment solutions have low-fee counterparts – you just have to do a little homework to find them.
This article is for educational purposes only. Some illustrations are based on hypothetical data and are not intended to reflect future values of any investment or returns investment in any fund. Commissions, fees and expenses may be associated with investment funds. Read a fund’s prospectus before investing. Funds are not guaranteed, their values change frequently, and investors may experience a gain or loss. Past performance may not be repeated.