I had a long overdue conversation with my financial advisor this past week. For the longest time, I have been putting a little bit of money in to mutual funds. These funds haven’t exactly been performing too well (understatement of the year).
To give you a better idea, I had around $30,000 in this mutual fund (Gasp!! Real Numbers!). I put $100 every month, it’s not a lot, but I have been doing investing outside of this automatic contribution as well. Remember that it’s the habit that’s important!
How a Mutual Fund Gets Paid
Mutual funds earn their money by the amount of assets (your money) under management. From that amount they charge a M.E.R. (Management Expense Ratio) on the money. This percentage charged is regardless of whether the fund makes or loses money.
The M.E.R. that I get charged by the mutual fund company to manage and invest my money is 3%.
This is independent of whether they actually make me any profit. The money is in a segregated fund. Which we set up a long time ago to protect ourselves to the downside in the wake of the whole financial crisis.
The Important Numbers
This means that I paid 3% on my $30,000 this past year, or $900 in MER fees. So with the $1200 ($100 a month) I invested over the past year, $900 of it went to the mutual fund company.
Another way of looking at it is the fund I was invested in made 5.3% for the year. After my 3% fee I cleared 2.3% return on my hard earned money. This means I took on a lot of risk to make the same amount as a high interest savings account.
Not cool. Not cool at all.
An Unpleasant Conversation With My Financial Advisor
So when my investment advisor needed to meet, and go over the new way they are required to disclose fees, there was a few things to discuss. We agreed to do it over the phone (which saved me 2 hours out my day getting there).
They sent me my statement to review the fees in advance. New legislation means they now have to disclose how much we are being charged. Until now I knew I have been paying these fees, but seeing them on paper changed things.
They changed things in a big way.
Here Is The Conversation:
Me: “Hi Carl, so I have been looking over my fees, and I’m not impressed one bit.”
Carl: “Yeah, I can understand why.”
Me: “Can you explain to me why I put in $1,200 this year to this fund and paid out $900 in fees?”
Carl: “Well… Those are the M.E.R. fees that’s the percentage the fund takes for managing your money. They take that on the total of your investments. So even if you hadn’t put in $1200 they still would have taken out their fee of $900. It goes by assets under management. You have $30,000 and their fee is 3%. Which is pretty high. I want to talk about getting you into a new fund that is much lower at 2%, that’s a third less in fees.”
“Ok,” I said, “But what happens if they don’t make money. Do I still pay that fee?”
Carl: “Yes, that fee gets charged no matter what, if you are investing in any kind of mutual fund you are going to pay this fee.”
Me: “Ok, I get that, I wouldn’t work for free, I don’t expect them too.”
Carl: “So what do you think about this new fund?”
“Honestly Carl, I don’t like it. This fund, and all mutual funds, seem to be gouging me. I get the pitch you need to give me is: “It’s only 2%” I know that’s only $2 on every $100 butit adds up.”
Carl: “Yes, it can add up, but that’s what’s charged for most mutual funds, and the fund is trying to beat the market (they all are, but that doesn’t mean anything).”
(Total aside, these funds are trying to beat the market. This can justify managing your money and charging higher fees, but a lot has changed in the last 10 years with the rise of ETFs or Exchange Traded Funds, levelling the playing field for us small investors).
Now Comes My Patented: “Here’s the thing…”
“Here’s the thing Carl,” I started. “This fund hasn’t beaten the market. So why would I stick with this fund, or any other, when I can buy an ETF that matches the market on my own? Or if I don’t want to do it on my own, go with robo-advisor like Wealthsimple (which you can get a $50 sign up bonus as a reader) that only charges me 0.5% to manage and invest my money.”
Carl: “That is quite a bit lower, honestly the fund you are in is too high. Which is why we are wanting to get you out of it. But we need to get paid too, which is why there is the 2% fee.” Carl said.
Side note: Honestly I sympathize with Carl, he’s a good guy. He has mouths to feed and the rules have changed and I can tell this isn’t the first time he’s had this conversation this week.
“I get that Carl, but it’s my money and that 2% difference adds up quickly. I’m sorry I’m going to need to switch. Cash me out”
What’s In A Percentage?
Taking a quick glance at Wealthsimple’s fee chart, they charge 0.5% on a portfolio under $100,000. In switching to Wealthsimple, the $30,000 that I have invested would cost me $150 in fees a year, not the $900 I just paid.
Under Carl’s new fee of 2% I would still pay an extra $450 over the 0.50% with Wealthsimple.
I have a few options. I can switch to Wealthsimple, manage my own funds through ETFs with Questrade, or switch to another fee only manager.
For right now I’m doing the first two. I like my dividend strategy, but I also want to have some money in the whole market. Wealthsimple makes it super easy to do this when I don’t have time to research stocks so I like the balance I have.
Honestly, I have no clue. For me to be as brazen to say fire your financial advisor would be terrible advice. Your situation is unique and what makes sense to my situation may not make any sense to yours.
The answer of course is: It depends on your situation.
What I do know is that if you are paying fees of any kind you should be aware of them. Those fees should get you something over and above investing in a under performing mutual fund like I was in.
Your money is important to you, and it should matter to the person managing your money too.
As for me, I’m sure this isn’t the last time I will have someone else manage my funds. For right now, Carl’s new fund fell into the “I can do this myself” part of the equation.
A Couple Of Takeaway Points
Don’t think of percentages as pennies that are easily discarded. Think of it as the actual amount, and what that means. Yes 3% on $100 is on $3, but over time that adds up. Small amounts count and not giving the small amounts the proper respect tunes you out to your money.
The small amounts are what make up bigger amounts. Want proof? Here’s how much I would save in by switching to Wealthsimple.
This is just based on fees. Wealthsimple is Fund 1 and my old mutual fund is Fund 2. Take a look at the second last line “Total Fees”
That’s $8,858.87 in fees I’m saving in 10 years based on nothing but a simple switch. I basically just saved the equivalent of a second trip to Disney.
Money doesn’t need to be all about huge sweeping changes, sometimes the small initial saving can add up to bigger things. In this case a small change will make a very big deal over the years.
What do you think? Should I have stuck with my advisor or am I right for going out on my own?
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