The behemoth of the mutual fund industry was built on embedded fees and it worked so well over the years that the Canadian mutual fund industry is now well over the trillion dollar mark. People who would be totally left out of the financial markets have been able to invest and create a different future for themselves and their families. Now, with long term meaning until the next hot thing comes around, discount brokerages and day trading, exchange traded funds (ETF's), not to mention that everybody's neighbour or kid is a trading or market expert, things have changed. Now we have the new kid on the block - Crypto - getting a lot of attention. I have my own opinions on "crypto" which will be another post. What hasn't changed though is investor behavioural psychology and that is why I feel that there should have been much more effort put into investor education and financial literacy before rolling out some of the changes. The current situation is kind of reminding me of the multi-level marking buy term and invest the difference era of the life insurance industry. It didn't work out so well for a lot of people who ended up with dud policies and they didn't get rich in the twenty years they were supposed to so that they wouldn't need the life insurance. There were lots of "pie in the sky" marketing and so many people got fooled all because sales people told vulnerable people they were being ripped off by owning permanent life insurance. So here we are at another juncture in the financial services industry that will impact millions of people in the years to come.
The only thing that's constant is change so I believe when the dust settles everything and everyone will find their new normal. In the mean time here are five mistakes I see investors making in pursuit of low management fees.
Mistake #1 - Dumping a well managed fund with proven track record with good returns for a do-it-yourself option even though they do not have the knowledge, time, experience to "do it yourself". They hear the argument from friends, or from a competitor who wants their business and of course the competitor shows them a fund with 20 or 30 basis points lower management fee without properly comparing investments and they jump.
Mistake #2 - Not taking income tax into consideration when deciding to move non-registered investments. So is triggering a $30,000, $50,000 or even a $100,000 capital gains to save 20 beeps of management fee worth it? This tax issue is huge because depending on age and financial situation having additional taxable income could throw off qualification for many benefits and programs. But tell me who likes paying an extra $10,000, $15,000 or $25,000 in income tax?
Mistake #3 - Not finding out the cost of fees (deferred sales charges, transfer out fees) before making the decision to move an account. Sometimes a few months would make a difference. Sometimes the change can be made in stages but because the homework is not done, the costs of moving the funds erodes or even wipe out completely any gain or potential gain by paying a lower management fee. In many cased the client wind up in a much worse situation.
Mistake #4 - Lower management fee does not automatically mean higher returns.
Mistake #5 - Chasing returns. If you are chasing returns, chances are good that you are chasing last years returns. Returns are always in the rear view mirror, so having a plan and knowing your risk level and selecting investments that align with your comfort level and your money philosophy is more important than chasing returns in the long run.
Mistake #1 - Dumping a well managed fund with proven track record with good returns for a do-it-yourself option even though they do not have the knowledge, time, experience to "do it yourself". They hear the argument from friends, or from a competitor who wants their business and of course the competitor shows them a fund with 20 or 30 basis points lower management fee without properly comparing investments and they jump.
Mistake #2 - Not taking income tax into consideration when deciding to move non-registered investments. So is triggering a $30,000, $50,000 or even a $100,000 capital gains to save 20 beeps of management fee worth it? This tax issue is huge because depending on age and financial situation having additional taxable income could throw off qualification for many benefits and programs. But tell me who likes paying an extra $10,000, $15,000 or $25,000 in income tax?
Mistake #3 - Not finding out the cost of fees (deferred sales charges, transfer out fees) before making the decision to move an account. Sometimes a few months would make a difference. Sometimes the change can be made in stages but because the homework is not done, the costs of moving the funds erodes or even wipe out completely any gain or potential gain by paying a lower management fee. In many cased the client wind up in a much worse situation.
Mistake #4 - Lower management fee does not automatically mean higher returns.
Mistake #5 - Chasing returns. If you are chasing returns, chances are good that you are chasing last years returns. Returns are always in the rear view mirror, so having a plan and knowing your risk level and selecting investments that align with your comfort level and your money philosophy is more important than chasing returns in the long run.
Want to know more? get in touch.
Beverley
Investment Fund Advisor & Life and Health Insurance Advisor
Desjardins Financial Security Investments Inc.
Desjardins Financial Security Independent Network
Ontario Central Region (OCR), GTA West Branch
5070 Dixie Road
Mississauga, On L4W 1C9
T. (905) 276-9456, Ext 4414
E. beverley.allen@dfsin.ca
November 21, 2022
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