In recent columns, Jon Chevreau took Investors Group to task for the sky-high MERs charged by its mutual funds. He rightly questioned why investors have $12.73 billion parked in the Investors Dividend Mutual Fund with a MER of 2.69% when the iShares Dow Jones Select Dividend ETF (TSX: XDV) has pretty much the same holdings and charges a MER of just 0.53%. Even after accounting for a financial advisor fee of 1%, holding XDV leaves slightly more than an extra 1% in the investor’s pocket.

While it is important to point out that mutual fund fees are egregious, it is also important for Canadians to take the initiative and do the math on how much fees are costing them. Let’s say John invests $10,000 in the Investors Dividend Fund. Jane, on the other hand, invests $10,000 in XDV through an advisor. One can reasonably expect the two funds to post the same returns given that the holdings are very similar. Assuming XDV returns 6%, Jane will have $32,000 after 20 years. John’s investment, on the other hand, will only grow to $26,500 since Investors Dividend Fund will return about 1% less.

There is no reason to just wring out hands in despair over high mutual fund fees. We have plenty of choice when it comes to low-fee investments. Investors can assemble sophisticated portfolios with Exchange-Traded Funds (ETFs) or mutual funds either on their own or through an advisor. Plenty of low-cost active management options also exist. Mutual fund companies like Phillips, Hager & North and Steadyhand have fund in their line up that charge less than half the fees charged by a typical mutual fund and also offer some handholding. And companies like Jarislowsky Fraser offer active management at a fraction of the cost of typical mutual funds.

Mutual Fund companies like Investors Group are for-profit enterprises and there will never be much incentive for them to cut their fees (and take a hit to profits) as long as Canadians are content to hold their fee-laden products. If more Canadians become fee conscious and opt to move their investments to low-fee products, companies like Investors Group will likely be forced to reduce their fees to stay competitive.

This article has 25 comments

  1. Thanks for the Steadyhand mention CC!

  2. It’s easy to despair over the fact that mutual fund companies don’t seem to need to be competitive on fees. However, I’m content to make small improvements to my corner of the world even if I can’t make big changes.

  3. I agree Michael. We can’t rationally expect Investors Group to act differently. They are in the business of making profits. We investors can also act equally rationally by opting for low-cost products.

  4. I agree entirely, CC. Caveat emptor!

  5. The thing is that people *do* seem to know that fees are important — most people I talk to tell me that they’re in low cost funds, but more often than not it turns out that they’re in something their bank set up for them that has a MER above 2%. I was in a coffee shop a few months ago and overhead an advisor putting a young couple into funds with a MER of 3.2% and assuring them it was a good, low fee. At some point, there has to be a mechanism to impose some degree of fiduciary responsibility on the pushers of these products, perhaps with mandatory warning labels like cigarette packages (e.g. “this fund is 450% more costly than an index fund in its asset class…”).

    I have noticed that Investors Group targets new immigrants who sometimes have language barriers that makes it a little easier to take advantage of them. I suspect they’re probably going after seniors with diminished mental capacity as well. It’s depressing.

  6. @Viscount: I’ve seen that too. People focus on “no-load” but not the MER.

  7. Thanks for the post CC, but the way you present the date underestimates the impact of fees. I’m not finding fault with you, because that is usually how it is presented.

    Assume the a foreign index fund goes up 9% a year. Assume 3% inflation. Assume taxes take 33% of the nominal return. So you’re left with a 3% aftertax afterinflation return. My index fund costs me 0.5% in fees. So the fund took 17% of my return. My return is 2.5%.

    Let’s assume you are in a high cost actively managed foreign fund. Make the same assumptions about return, taxes and inflation. But assume the fund takes a cut of 2.5% a year. So the fund is taking 83% of my return, and I’m left with the other 17%. My return is 0.5%, 20% of the index investor.

  8. When quality no load, low fee, Fund companies are highlighted, I would love to see Mawer Investment Management mentioned, as well as some of the other good investment counselors, such as Leith Wheeler and Beutel Goodman. For full disclosure, I work for Mawer.

    • I agree Jamie at Mawer. There are some low cost fund available like Mawer and they should be mentioned more. Investors Group is a rip-off but they have a lot of sticky clients and they take advantage of that.

  9. @Viscount: I agree that regulation might help but I also think that investors should also help themselves and take some ownership of their portfolios. Often I see even very well-educated folks with graduate degrees haven’t bothered to figure out the impact of fees.

    @Park: I did ignore the impact of taxes and inflation but I think your calculations overestimate the impact. That’s because MERs are paid before taking taxes into account. Using your numbers, index goes up 9%, index fund investor is left with 8.5% nominal pre-tax, 5.61% after tax and 2.61% after adjusting for inflation. The high-fee mutual fund investor is left with 6.5% nominal pre-tax, 4.29% after-tax and 1.29% after adjusting for inflation. That’s slightly less than half the return of the index investor.

    @Jamie: It wasn’t completely clear to me whether Mawer, Leith Wheeler & Beutel Goodman offer some sort of client hand holding. i.e. some help putting together a portfolio etc. Still, I agree with you that the names mentioned here offer low-cost funds and deserve to be mentioned.

  10. I have colleagues married to Investors Group (IG). They recognize the high MERs. What they value is the advisor/client relationship which is strong with IG and they put up with the fees because they value their friendship relationship with their advisors. IG teaches their clients that: “investors who work with financial advisors (advised investors) have more wealth and investible assets, on average, than those who do not.” They have studies to prove it. It’s not hard to understand this. Even veterans in the field like Gordon Pape sees DIY buy/hold investing a failure largely due to how easy it is to press the sell button in your discount brokerage online account. DIY investors easily panic and make dreadful mistakes and having an advisor holding your hand and as a friend bringing calm to you during these difficult times saves you money. That’s why my colleague with IG hold on to their advisors and hold on to their investments! In the end many are better off despite the high MERs.

  11. @Jon Evan: That’s not the reason why people with advisors have more investible assets. The real reason is that people with no investible assets have no advisor. This skews the averages.

  12. If an advisor selling me high MER product holds my hand with his right hand and has his hand in my wallet with his left, is it really hand holding or just compassionate fee gouging? I guess I feel better if he’s held my hand while he/she is making a mint off of me- shows they care and all right?

    I feel this is very much a cultural issue. Canadians seem to not put up too much of a fight while being taken advantage of by big companies, consumer protection laws are relatively toothless and we are a deferential lot by nature. I totally agree with you but I think this is where culture eats strategy for lunch every single day of the week (although I very much hope at one least one person follows your advice after this post).

  13. Excellent article. Blast the rip-off artists. Well, OK, they are just another business making money in our capitalist society.
    What I don’t like is the “hidden” fees – I agree with the comment about having warnings similar to cigarette packages.
    About 30 years ago I looked more into my mutual funds MER and hidden fees, and discovered that Investors (Synticate) was one of the highest, with lower returns. I consequently got out of all their products.
    Today, I am happily totally self-directed, self-managed investor. I only have myself to blame for poor returns, and IT FEELS WONDERFUL!
    I have no mutual funds, only invest using GICs, index funds, and ETFs, all on a low-cost online broker. Very satisfying. It’s my hard-earned money and I can do what I want with it!

  14. I am currently with Investors Group and am planning to sell/transfer everything to my own discount brokerage so I can save 2% in MER fees using index funds. It’s going to be better in the long run. The only thing I wish is that I would have had the foresight to know that things can change in a couple of years. All my funds are in A funds and have a DSC (I didn’t know any better at the time b/c I was “saving for retirement”). I’m taking a $4000 hit just to get out. “The reason DSC charges are so expensive, is b/c they are worth it.”

  15. @Fuchsy44: Well done. I did the exact same thing a few years ago (and took about the same DSC $ hit). You’ll make the “loss” up quickly, but more importantly feel much better! I moved everything from an expensive (high MER) firm to a discount brokerage and bought a couch potato distribution of iShares.

    The last straw was during a quarter when management fees ate up my entire dividend/money market/interest distributions (across all accounts); and then they asked me for a cheque to cover the remaining management fees. Of course they tried to keep me – emphasizing the same points that you would hear from IG; but unless they were prepared to renegotiate fees…

    I was also at a point in which I was directing most of the investment portfolio anyway. Perhaps in a few years, it might be worth someone to have a look at my portfolio – but that would be based on a fixed or hourly fee.

    A lot more fun watching distributions grow rather than hoping they will cover management fees!

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  17. @Jon Evan: Like Michael pointed out, I disagree with jumping from correlating net worth and financial advice to inferring a causal relationship. I personally think a good advisor can add value. However, most advisors are simply product pushers and are simply collecting fees.

    @Thicken My Wallet: I don’t know if it is culture or mere inertia. For example, I bitterly complained about Bell for years but did nothing about it. Then I moved my business to Teksavvy and now I pay less fees and receive the exact same product. I wonder if something like this is at play with mutual funds as well.

    @Pacific, Fuchsy44 & Finally Free: Good for you. I agree that if you do financial advice, it is better to pay for someone’s time. It leaves more money in your pocket and the advisor is likely to be impartial; at least they won’t be benefiting financially from their advice.

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  20. I am an Investors Group consultant. I understand people’s confusion and frustration with fees however, if you see what I see what I do on a day to day basis, there would not be any question as to whether they are worth it. I perform full financial reviews with a full written financial plan for ALL of my clients. This includes not only investments but cashflow analysis, tax planning, retirement planning, asset protection and estate planning. I clean up a lot of cashflow issues that banks seem to overlook – lots of debt at high rates of interest. Offering Tax Free Savings Accounts, GICs, and other savings tools that are offering rates of return not even close to keep up with inflation. They LOVE to see people with high mortgage and credit card/loan interest rates and will only look at negotiating new rates when I have the client look for better rates. I help clients to free up cashflow, pay less in interest, and pay off debts faster. I help clients to free up cashflow to use towards saving for emergencies, buying a home, children’s education, and their retirement. I look for ways for clients to retire earlier or with a higher income. I look at ways to save them taxes now and to pay less tax at retirement… and death. When I look at what other financial institutions have invested their hard earned money in, I am amazed. There is no consideration of the client’s risk tolerance or asset allocation. Typically I see them invested in only one or two funds with no proper diversification or rebalancing taking place. I help people to plan for unexpected financial impacts of health and related events in their lives. I make sure that CRA doesn’t take half of their assets and estate upon death. And with all of this, I maintain one-on-one relationships with my clients – remembering their birthdays and other special events in their lives. I am available to them days, evenings, and weekends. When someone becomes my client and sees what services I offer with no annual fees, no limitation of time, they realize that my services are priceless. Many of the services I provide do not provide me with any income. They are constantly thanking me for my assistance and service I provide.

  21. @Anne – My advisor at Investors Group did similar things to what you are saying. He was great; customer service, future planning etc. I no doubt believe that you (and him) earn your portion of the MER. But the cut that IG and the money managers take makes them one of the most expensive in the country and now that I’ve decided to move to passive investing I am very happy with the money I know I am saving on fees. For me, I don’t need the “cashflow analysis, tax planning, retirement planning, asset protection and estate planning” as I do my own research and have friends I chat with about this stuff. But I am also interested in doing so. For people who don’t want to do that, the services you provide are invaluable.

  22. I am not sure why IG is targeted, and I know they do provide many services, but reality is that most of their Funds are NOT top performers, so you lose money not only to MER but to underperformance.
    Royal Bank have a great site, you map out your asset allocation, detail your goals and expectations, you get instant guidance.
    Many people need advisors, managing their finances is of zero interest, so nothing wrong with paying for service, DIY ‘rs are not in that class.
    A Million Dollar portfolio could be made up of less than 10 ETF’s and outperform the market.

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