When initially choosing which investment option to go with, many people don’t realize the impact investment costs have on their investments. The more your investments cost you, the less you have to invest.
Your net return can increase by either improving your return, lowering your cost of investing, or a combination of both. Over time, this can have a significant impact to your bottom line due to the power of compounding growth.
Exploring the costs associated with different investment options
To illustrate, we will use Mrs. Smith, a 60-year-old investor who recently sold her home and has $1,000,000 in the bank in a non-registered account and a fully funded Tax-Free Savings Account (TFSA). She is in the 30 per cent income tax bracket. Mrs. Smith is not interested in managing her own investments and is curious about four different investment options she has heard of from talking with her neighbours, former colleagues and friends.
We met with Mrs. Smith and assisted her in exploring these four investment options, looking at the transaction costs to initially get investing, ongoing costs, and the tax deductibility of these costs.
Option one: Exchange Traded Fund (ETF) approach
Investing through Exchange Traded Funds (ETFs) is often referred to as “couch potato” investing. Exchange Traded Funds are a pooled investment security that trade on an exchange. ETFs will track a certain index, sector, commodity, etc.
This approach is passive as it holds the investments that are in the respective index and these holdings are not actively managed. When investing in ETFs, your returns will only ever be as good as those of the index it tracks, less the embedded cost.
To purchase ETFs, there are upfront costs to initially buy the holdings in the first year, as well as ongoing embedded costs annually thereafter — neither of which can be deducted for income tax purposes.
To illustrate the initial transaction costs, we will assume that Mrs. Smith buys 11 different ETFs at $90,900 each. The equity commission schedule for trades at this amount is 1.75 per cent. This commission cost must be factored into how much of each ETF Mrs. Smith can buy.
Each trade will cost Mrs. Smith $1,591 ($90,900 x 1.75 per cent). Multiply that over the 11 total trades and on day one this option costs Mrs. Smith $17,498. After factoring in the cost of the initial trades, this then leaves Mrs. Smith with an initial investment of $982,502.
There will also be subsequent costs if Mrs. Smith sells and buys ETFs going forward. On top of the initial commission charges, the annual embedded cost of investing for this option can be around 0.5 per cent, or $4,913 in the first year ($982,502 x 0.5 per cent = $4,913). This brings the total cost to investing in the first year up to $22,411.
Option two: Direct holdings in a fee-based account
Another option is to work with a Wealth Advisor or Portfolio Manager and purchase direct holdings in a fee-based account.
The cost for the option of holding direct holdings in a fee-based account can fluctuate depending on the Wealth Advisor or Portfolio Manager you are working with, and the amount you have invested. The fee charged often decreases as the account value increases. The benefit of this option is that an advisor can assist you with strategic adjustments with no additional costs.
Option two is the most transparent with respect to fee disclosure of all options. If Mrs. Smith put the $1,000,000 into a fee-based account, we would price this at 1.00 per cent.
For our example, the 1.00 per cent fee would equal $10,000 in the first year ($1,000,000 x 1.00 per cent = $10,000). This $10,000 is all inclusive and there are no other embedded fees or transaction costs. There are no up-front costs associated, and fees are billed quarterly, at the end of each quarter.
These fees are also considered investment counsel fees for income tax purposes and can be deducted on her income tax return. As Mrs. Smith is in the 30 per cent income tax bracket, this brings her after-tax fee down to 0.7 per cent.
Mrs. Smith’s after-tax cost of investing is brought down to $7,000 with the $3,000 tax savings from being able to deduct our fee ($10,000 x 30 per cent) with this option. The total cost in the first year is $7,000.
Option three: Holding a basket of mutual funds
Mutual funds are actively managed and have embedded annual fees called a Management Expense Ratio (MER) and trading costs referred to as Trading Expense Ratio (TER).
In addition to the MER and TER, mutual funds may be sold on either a no-load or a front-end basis with additional fees of up to five per cent initially. Neither the embedded fees or additional fees are deductible for income tax purposes.
Previously, funds could also be sold on a back-end basis where you would typically not be charged an initial fee, but would be charged a fee if you sold the fund within the applicable Deferred Sales Charge (DSC) period. Effective June 1, 2022, DSC mutual funds are no longer allowed, and for good reason in my opinion. If Mrs. Smith was sold DSC mutual funds and was not happy with her performance, or wanted to make a change within the DSC period, she may have to pay up to six per cent to sell the mutual fund.
For purposes of the illustration, let’s see what the upfront and ongoing costs would be to Mrs. Smith if she purchases $1,000,000 of front-end mutual funds with a three per cent initial sales charge (ISC).
With this option, the ISC eats into her original investment. Mrs. Smith would pay $30,000 ($1,000,000 x 3.0 per cent) in ISC, leaving $970,000 ($1,000,000 – $30,000) to be invested. On top of the ISC, there is also embedded MER and TER which totals 2.3 per cent annually.
Mrs. Smith will be paying annual embedded MER of $22,310 in the first year ($970,000 x 2.3 per cent). The total cost to Mrs. Smith in the first year is $52,310 ($30,000 ISC + $22,310 MER).
Option four: Holding a basket of segregated funds
Mrs. Smith has heard about some guaranteed insurance products called segregated funds.
The primary difference between mutual funds and segregated funds is that the latter is an insurance product. Being an insurance product, the investments can be set up with different maturity and death benefit guarantees.
Another feature is segregated funds have the ability to name beneficiaries to bypass probate and public record. Similar to mutual funds, segregated funds can also be sold as no-load or ISC, and have embedded MER and TER, neither of which are tax deductible. Effective June 1, 2022, DSC segregated funds are also no longer permitted.
To illustrate, we will see the total and ongoing costs to Mrs. Smith if she purchases $1,000,000 of segregated funds with a three per cent ISC.
Similar to the mutual fund example above, Mrs. Smith is left with a smaller investment after paying the ISC. Mrs. Smith would pay $30,000 ($1,000,000 x 3.0 per cent) in ISC, leaving $970,000 ($1,000,000 – $30,000) invested. On top of the ISC, there is also embedded MER and TER which totals 3.5 per cent annually. Mrs. Smith will be paying an annual embedded MER of
$33,950 in the first year ($970,000 x 3.50 per cent). The total cost to Mrs. Smith in the first year is $63,950 ($30,000 ISC + $33,950 MER).
The power of compounded growth
The long-term effect on accumulated savings can be quite shocking when different net returns are explored over a 10-year period. To help with the illustration, we will assume that investment returns over the next 10 years will be six per cent for all four options.
Running the numbers
Option one: Exchange Traded Fund (ETF) approach
The net return is 5.5 per cent (6.0 per cent less the 0.5 per cent embedded ETF fee). A net return of 5.5 per cent compounded over 10 years would have grown Mrs. Smith’s $982,502 (amount invested after factoring in the initial commission charges) to $1,678,255.
These numbers assume that no changes were made to the basket of ETFs. Costs are low with this option; however, performance is an important component. There is much debate about the performance of ETFs as you will only ever do as well as the index you are tracking, less the embedded costs of the ETF.
With this option, costs can only be kept low with inactivity as there are costs to buy, sell or switch the ETFs held, as illustrated by the initial costs of $17,498. Having a Portfolio Manager making strategic adjustments to your portfolio will result in greater performance than the ETF approach in our opinion.
Option two: Direct holdings in a fee-based account
The net return is 5.3 per cent (6.0 per cent less the 0.7 per cent after-tax fee).
A net return of 5.3 per cent compounded over 10 years would have grown Mrs. Smith’s $1,000,000 to $1,676,037. In the first year, option two is by far the cheapest ($7,000 with option one compared to $22,411 with option two). On an ongoing basis, the cost differential of option two over option one is approximately 0.2 per cent, after tax (5.5 per cent – 5.3 per cent).
This cost would more than likely be offset by higher returns achieved with a good Portfolio Manager who is able to actively manage your portfolio and make strategic changes. A Portfolio Manager is also able to manage the day-to-day investment decisions and administration of your accounts, while also providing Total Wealth Planning and holistic service.
Mrs. Smith does not want to manage her investments, so by working with a trusted and knowledgeable Portfolio Manager she can focus on what truly matters most to her.
Option three: Holding a basket of mutual funds
Option three has a sizeable increase in fees compared with options one and two. When compounded over 10 years, the difference is significant.
With this option, the net return is 3.7 per cent (6.0 per cent less the 2.3 per cent fee). A net return of 3.7 per cent compounded over ten years would have grown Mrs. Smith’s $970,000 (amount to initially invest after factoring in the $30,000 ISC) into $1,394,952.
This equates to a $281,085 difference over only 10 years when compared to option two ($1,676,037 – $1,394,952).
Option four: Holding a basket of segregated funds
With the segregated funds option, the net return is 2.5 per cent (6.0 per cent less 3.5 per cent fee). A net return of 2.5 per cent compounded over ten years would have grown Mrs. Smith’s $970,000 to $1,241,682.
The difference between option four and option two is a whopping $434,355 ($1,676,037 – $1,241,682)!
We encourage all investors to find out what their cost of investing is and to determine both the initial and ongoing costs. Small differences can have a material impact on your long-term financial success.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management, with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250-389-2138, email email@example.com, or visit greenardgroup.com.
German Hydrogen Utility HH2E Wins Investment From UK Firms – BNN
(Bloomberg) — London-based private equity company Foresight Group Holdings Ltd. and investment firm HydrogenOne Capital Growth Plc acquired stakes in HH2E AG and will help the new hydrogen company to develop green energy projects in Germany.
Foresight and HydrogenOne have taken minority equity stakes in HH2E and agreed to co-invest in energy projects, the German company said in a statement on Monday. HH2E — co-founded by Andreas Schierenbeck, former chief executive officer at utility Uniper — plans 2.7 billion euros ($2.8 billion) of investment to build 4 gigawatts of green hydrogen and green heat-production capacity by 2030.
“Germany has one of the largest industrial and manufacturing sectors in the world,” said Schierenbeck. “Leaders in these sectors know they must secure the supply of energy, control energy costs, and find low- or zero-carbon solutions soon. HH2E will be producing green hydrogen located close to the industries that need it.”
Germany aims to get almost 100% of its electricity from renewables by 2035, and is racing to expand green energy capacities as it tries to pivot away from reliance on Russian natural gas. The country plans to install 10 gigawatts of electrolyzer capacity by 2030 to scale up the hydrogen market.
Russia’s Invasion Supercharges Push to Make a New Green Fuel
The two British investment companies will provide most of the capital needed for HH2E’s first five green hydrogen projects, which will need a total of 500 million euros in development costs and have an initial capacity of 500 megawatts. Some of them have the potential to be expanded to 1 gigawatt, according to Schierenbeck.
HH2E seeks to produce green hydrogen cheaper than grey hydrogen — made from natural gas — in the coming years. It is “clear that the economics of green hydrogen are better than the grey and blue, as the latter two depend heavily on the cost of natural gas and carbon,” said Schierenbeck.
“This financing agreement enables a massive acceleration of our development plans,” said HH2E co-founder Mark Page.
©2022 Bloomberg L.P.
It's an ideal time for adopting the Number One defensive investing strategy for retirees – The Globe and Mail
The best way to protect your retirement savings from a market crash is to safely park enough money to cover your income needs for two to three years.
Until 2022, safe parking has meant dead money. Now, with interest rates rising, you can adopt this strategy with a smile on your face. Rates were high enough in mid-May that you could build a three-year ladder of guaranteed investment certificates earning an average return of as much as 3.8 per cent.
A feature of every stock market crash I’ve seen as a personal finance and investing writer is the senior distraught over the idea of having to sell hard-hit stocks and equity funds to cover the minimum annual required withdrawal from a registered retirement income fund. In both the 2008 and 2020 crashes, the federal government allowed a 25 per cent reduction in the minimum RRIF withdrawal for those years. But that’s only a limited benefit and, anyway, seniors shouldn’t depend on the feds for help with their investment portfolios every time stocks plunge.
The best strategy for protecting a RRIF against inevitable stock market declines is to keep a reserve of money to draw from when selling stocks or equity funds would lock in a serious loss. At bare minimum, have enough money for one year. At best, try for two to three years.
You could keep this money in a high interest savings account, where rates have recently climbed to between 1.5 and 2 per cent at best among alternative bands and credit unions. If you have the financial flexibility to lock money into a GIC, the best one-, two- and three-year rates in mid-May were 3.35, 3.95 and 4.1 per cent, respectively.
Those rates were available from alt banks that sometimes don’t offer RRIF accounts. An alternative is to see what GIC rates your broker offers for RRIFs. Online brokers have unusually competitive GIC rates right now – not as high as alternative GIC issuers like Oaken Financial and EQ Bank, but close.
With a three-year GIC ladder, you invest equal amounts in terms of one through three years and invest each maturing GIC into a new three-year term. If a two-year term seems a better fit for you, try that. They key is to have cash safely stowed so that you can give your stocks time to recover from the next stock market decline.
— Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Colliers International Group Inc. (CIGI-T) On May 3, the global real estate services and investment management company reported solid first-quarter earnings results and increased its 2022 outlook. Yet, high inflation, rising interest rates and concerns about a potential recession continue to weigh on stock markets, including Colliers, which is down 23 per cent year-to-date. There has been opportunistic buying on this price weakness, with the company repurchasing nearly 1 million shares in March and April. As well, the chief executive officer recently invested over $17-million in shares of Colliers. Should investors consider buying shares as well? Jennifer Dowty looks at the investment case.
Now is the perfect time to slay these five investing myths
During volatile times like this, it’s important not to let myths sabotage your investing plan. Some of these myths are so pervasive and ingrained in our culture that many people don’t question them. They reflect the way investing is portrayed in the media, from financial websites and business channels to movies and the evening news, where dramatic events – especially ones in which people make or lose a lot of money – get the most attention. John Heinzl presents five of the most common investing myths. Become familiar with them so that, to paraphrase Rudyard Kipling, you can keep your head while everyone else is losing theirs.
Know your history before buying the current dip
Investors who bought stocks in the depths of the great financial crisis in early 2009 were quickly rewarded. So were those who bought the dip in the early days of the COVID pandemic. Will that same bounce occur again? Don’t count on it. Share prices will no doubt eventually recover from their recent weakness – they always do – but reaping the rewards is likely to require more patience this time around, says Ian McGugan.
Bank stocks are reflecting a lot of risk. Now let’s look at the reward
Canadian big bank stocks have tumbled more than 14 per cent over the past three months, as concerns about an oncoming recession rattle equity markets. The potential rewards of buying into this dip are becoming hard to ignore, says David Berman.
Why the Canadian dollar is poised to surge
Forex traders beware: economist David Rosenberg and his team believe any dip in the Canadian dollar should be bought. In fact, they think the loonie is considerably undervalued and will soon zoom up to 83 cents (U.S.). Here’s why.
Why this portfolio manager sold his Magna stock (and wishes he’d bought Disney)
Money manager Denis Taillefer is holding a lot of cash, awaiting what he calls ‘peak interest rate hawkishness.’ Brenda Bouw speaks to the senior portfolio manager at Caldwell Investment Management Ltd. to find out what he has been buying and selling.
Others (for subscribers)
Monday’s Insider Report: CEO and CFO are buying this high-yielding REIT with a 32% gain forecast
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation – a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: I have stocks in my TFSA and in my cash account. There’s one investment in my TFSA that I think will pay off but will take longer to do so than some in my cash account.
I’m thinking of transferring the one in my TFSA out in kind, creating plenty of room so that I can transfer in some of the investments that are closer to the finish line. What do you think of this strategy? – Chantal M.
Answer: Your logic puzzles me. The main objective of a TFSA is to maximize the tax-sheltered profits on your invested money. But your suggested approach would do the opposite. Let’s look at the two sides of your equation.
You say the stock in the TFSA looks promising but will take longer to pay off. But as its value grows in the TFSA, those gains will be tax-free. Moving the stock to your cash account will mean all the gains from the time of the switch will become taxable when you sell.
Meantime, you want to move stocks that are “closer to the finish line” into the TFSA. To what end? If they are that close to your sell objective, most of your gain is already taxable. Remember, when you make a contribution in kind, the Canada Revenue Agency considers that as a sale at the market price on the day the shares go into the TFSA. You are taxed accordingly. If you really plan to sell soon, moving those shares into the TFSA will not be of much benefit.
You need to consider the potential profit of each stock, not from the time you bought it but from the day it goes into (or comes out of) the TFSA. Those with the highest long-term growth potential should be in the plan.
What’s up in the days ahead
Bonds have been producing terrible returns this year, but many investors still want to hold them as a stabilizer in a balanced portfolio. Are short-term bond funds the way to go? Gordon Pape will have some fixed income advice.
Share your investing successes (or misfires)
Are you interested in being interviewed about your first stock purchase? Globe Investor is looking for Canadians to discuss their experience as part of this new, ongoing feature. If you’d like to be interviewed, please write to: firstname.lastname@example.org with “My First Stock” in the subject line and include a short description of your first stock purchase.
Compiled by Globe Investor Staff
New Zealand Plans More Digital Skills Investment to Bridge Gap – BNN
New Zealand will make a new investment in the digital technologies sector with the aim of increasing skills development and encouraging local companies to market their talents globally.
The government will allocate NZ$20 million ($13 million) over four years from this week’s budget, Minister for the Digital Economy David Clark said in a statement Monday in Wellington. The spending will support the growth of the Software-as-a-Service community and take a new a marketing initiative led by industry in partnership with government, to the world, he said.
“Through this new funding, the SaaS Community can build its momentum further and expand its network,” Clark said. ‘It will also support the delivery of short courses for digital skills development.”
The government wants to address a shortfall of investment in technology education that has created a skills gap and forced several local companies to shift offshore to find the talent they need. A report from the OECD highlighted a weak pipeline of advanced information technology skills while Wellington-based game developer Pikpok this year opened a studio in Colombia to tap talent there that isn’t available at home.
“We know for the digital sector to grow, it needs access to the right people,” said Clark. “Historically, there has been a ‘skills mismatch’, but the key to future success is training our domestic talent with the right skills, and encouraging New Zealanders to participate, whatever their background.”
Changes to the immigration system will help alleviate some of the immediate pressures on industry, with key roles including software engineers entitled to fast track residency, he said.
©2022 Bloomberg L.P.
‘Think Before You Link’: app launched to help social media users detect fake profiles – The Guardian
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Beware a global economy with little fires everywhere – The Guardian
Silver investment demand jumped 12% in 2019
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