You’d think after decades hearing and reading about the long-term impact of high investment management fees on our retirement nest eggs, Canadian investors would have gotten the message by now. Among the more entertaining TV ad campaigns on this topic have been Questrade’s recent commercials about belatedly enlightened individual investors fending off the inane arguments of financial “professionals,” a.k.a. salespeople. “You’ll see the results in the end; it’s a long-term game,” an advisor at a large financial institution says smugly, in an attempt to brush off a client’s questions about high fees and his low returns. The client fires back: “It’s not a game. It’s my retirement.”
All of which makes the new RRSP survey from the same Questrade Inc. of more than usual interest. The survey—released this week by the independent discount brokerage—finds 87% of Canadians either don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20-plus years). The survey checked in with 1,508 Canadians in December 2019, using Leger’s online opinion panel. Timed for RRSP season, the survey’s intention is to show that many investors “hold misconceptions that could be costing them money, especially in the long term.”
While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that a whopping 47% still don’t even know what they’re paying for mutual funds.
There are also disturbing generational differences. Retiring Baby Boomers largely seem to have gotten the message on fees and investment returns, judging by the growing popularity of ETFs (exchange-traded funds) and robo-advisor services that package up ETFs for a slightly higher fee.
But just as cigarette makers targeted new foreign markets after their initial “wins” started to die off, fund companies can see a new generation of seemingly fee-oblivious investors coming right up. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. “You get what you pay for” may be a valid principle if you’re buying luxury homes, automobiles or gourmet dinners, but this is an oddly quaint belief when applied to investing. The operative principle behind the surge in indexing and ETFs is that “costs matter,” and the lower the costs, the better.
Yet Millennials and Gen Z seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (versus just 18% of the 55-plus cohort).
Questrade estimates that a 1% decrease in fees over a typical 30-year investing horizon could result in 27% to 29% more money in one’s retirement kitty, assuming a 7% to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference in impact 2% fee versus a 1% fee would make on the value of their portfolio over the long run. That is, 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2% to 1% will have a big impact on returns over 30 years.
Sadly, the survey shows the usual amount of inertia about saving for retirement. While Canadians are, indeed, worried about retirement “they’re not doing anything about it,” Questrade concludes, citing the poll’s finding that 59% of Canadians worried about retirement still plan to contribute to their plans the same way they did in the previous year.
They don’t come out and say it explicitly, but I’d guess that accounts for the stubborn entrenchment of the big branch networks, which sell a lot of high-fee “closet index funds.” Those tend to be the banks’ in-house “no-load” mutual funds that purport to be actively managed and charge MERs commensurate with that, but which hold most of the same securities lower-cost index funds hold.
Questrade—which facilitates do-it-yourself investors who buy investment funds or individual securities—takes aim at such high-fee mutual funds. It notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.
I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high. (It’s more than I’m willing to pay, personally, after building wealth for three-and-a-half decades, but for younger investors just starting out, 2% may not be that far out of line).
Clearly, there’s still a long way to go to achieve broad awareness of these issues: 76% of those who don’t know what fees they’re paying for mutual funds agree they are a good way to invest for retirement. Here I’d add that some indeed are: see my recent column in this space on the best mutual fund companies you’ve never heard of.
The Questrade poll finds 95% of Canadians don’t know that most mutual funds have been underperforming the last five years, or underestimate the extent of the underperformance. Questrade cites the SPIVA scorecard to underline the point that active management continues to lag low-cost indexes, which you can find here.
As the bloggers I consulted for my article mentioned above pointed out, when it comes to mutual funds, you need to beware of throwing the baby out with the bathwater. Some excellent fund families charge reasonable fees for active management that can often add value, although there are no guarantees this can be consistent or the funds identified in advance. The better ones tend not to incorporate embedded compensation, which is largely on the way out anyway, as I pointed out in this article.
Still, the Questrade survey indicates that despite the wealth of free expertise on the web and elsewhere, when it comes to raising awareness of fees and the impact of costs, our work here is not yet done. I fear we are bifurcating between a world of savvy financial consumers in which we are essentially preaching to the converted, and another camp of naïve uninformed investors who tend not to seek out such information, aren’t given it if they fall in with the wrong type of “advisor” and will eventually pay the price.
Jonathan Chevreau is founder of the Financial Independence Hub, author of Findependence Day and co-author of Victory Lap Retirement. He can be reached at [email protected]
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