A friend recently told me that when he’s been searching around for financial advice online, it seemed that it was almost a universal perspective that letting one of Canada’s Big 5 banks – RBC, TD, BMO, Scotiabank, and CIBC – sell you a mutual fund is a very, very poor choice. He wondered why that was. It was especially troubling for him because his retirement savings were accumulating in a mutual fund at one of these Big 5 banks. The answer to his question is illustrated in the following series of images.
The Problem with Mutual Funds
The problem with a lot of the “actively managed” mutual funds that the Big 5 offers is onerous fees. High fees, over time, eat away at the total value of your portfolio. It’s just the nature of how compounding works.
I’ve selected one mutual fund from each Big 5 bank that I believe would be the fund pushed on for the majority of people seeking mutual funds: the balanced growth funds. These mutual funds can come with an array of fees: from back load and front load fees to MERs. I will strictly focus on MERs here. The graphs I will use below only represent the effects of MERs on the total value of a portfolio.
Let’s start with CIBC. They charge the highest MER of the five funds I am sampling, with their CIBC Balanced Fund Series A at 2.45% MER. Let’s take a look at the erosion of your total assets over time in this fund:
2. TD Canada Trust
TD charges the second most with their TD Balanced Growth Series A Fund. At 2.30% MER, these are the results:
Scotiabank’s aptly named Income Growth Advantage Fund isn’t giving you much of an income advantage the longer you hold the fund at 2.09% MER:
RBC’s Select Growth Series A Fund isn’t much better:
BMO had the lowest MER of the five funds at 1.75% with their Asset Allocation Fund:
What About ING?
ING is marketed as an alternative to the Big 5. They offer convenient services and low-to-zero account fees. The mutual funds they offer are better than the Big 5. Here is a graph and spreadsheet image of ING’s Streetwise Mutual Funds:
What’s the Big Deal?
Is there a pattern you’ve noticed with all of these mutual funds? The longer you hold them, the more money you lose to the bank. It’s quite astonishing to think that one or two percent per year could erode your total assets with that kind of ferocity. It’s scary stuff and you should be aware of this tyranny of fees. I’d rather not lose 71.07% of my total assets after 50 years to CIBC. Would you?
Where Do I Go from Here?
The uncomplicated easy answer? Index mutual funds. Specifically, the TD E-Series Index Funds. It’s fairly straight forward to set up through TD Canada Trust or TD Waterhouse. It will take some of your time, but the benefits of substantially lower MER fees will be worth the time you spend to get it set up tenfold. Creating your own balanced growth fund will only cost you 0.42% MER. Here is what the effects of that look like:
Losing 19% of your total assets to the bank after 50 years is a hell of a lot better than losing 71%. You must always keep in mind that there are and will always be fees when it comes to investing. You can’t control that. Fees are a universal truth in the world of finance. What you can control is how much you pay in fees.
A little research and a little math can go a long ways towards keeping more money in your pocket rather than the bank’s.