Mutual Fund MER`s

[MonteDobson]

Do you get frustrated every time you open your RRSP statement?

We quit investing in mutual funds the day we discovered real estate, but it is still the norm for the average person to "sock away" any extra savings into an RRSP. Why do we do this? Good question...this is what we are supposed to do, right?

I thought I would provide some interesting tidbits on the the fees involved with your mutual funds. Here is what I came up with:

• Did you know MER`s of 2.1% can take over 47% of your money over 30 years...do the math!
• The Rule of 40 - To compute how long it takes MER expenses to consume 1/3 of your investment, take 40 and divide by your mutual funds MER (40/2.1% = 19 years to consume 1/3 of you investment)
  • or After "n" years, the percentage of your money you get to keep in a mutual fund is: (1-MER)N * 100
  • Canadians pay more for their mutual funds than any other developed country. Not a little bit more - a LOT more! More than any of the other 18 industrialized nations that were the focus of a joint Harvard and London Business School study, published last year
    • Source: http://randsco.com/index.php/2007/02/28/ex...e_canadian_mers84% of Canadians are comfortable paying the highest mutual fund fees in the world! (Source: 2006 IFIC Poll)Only 5-10% of fund managers can beat the S&P/TSX benchmark against which they`re measured.Put another way, you`ve got an 90% chance of paying high fees and not even beating an index
    Canadian "Mutual Funds aren`t bought, they`re sold". Check out this Globe & Mail Article for more info.Canadian banks spend more dollars on RRSP marketing than any other country...watch the marketing in early Jan/Feb when they try and sell you their "safe and secure" investments yielding a whopping 3%!
  Lastly, see for yourself. Check out this excellent MER calculator at Mutual Fund Calculator. Run some numbers and you will be shocked!

And we wonder why the average Canadian will struggle to get ahead and have enough money to retire? I hope you found this as interesting as I did.

If you have any comments, please fire away...I`d love to hear from you!

 

[willy]

I said to my wife tonight, I`ve never seen a real positive return from my rsp`s.

So, the question for me is, is there any way to invest the employer portion (DCPP) in something other than your average mutual fund?

w

 

[invst4profit]

It is not surprising. Canadians overpay for everything but as a "Layed back" culture we are accepting of that fact.
Compare our taxes to the rest of the world.

 

[TodorYordanov]

You can invest in second mortgage that is in the RRSP shell and it will pay you 9-15% interest.

 

[MonteDobson]

Hi Willy,

DCPP (Defined Contribution Pension Plans) are usually not transferable until you leave the plan or retire. Check with your planholder to find this out for sure. I know I can`t touch mine until I quit my job or retire.

 

[bigbabba]

yes, mutual funds are not great due to high fees, if you want to invest in paper assets then it`s better to go with ETF`s or index funds...or stocks if you feel like you can take more risk. Even though RE investing is great, I still believe that having some paper assets is also good and will give you a well rounded portfolio.

 

[Thomas Beyer]

QUOTE (willy @ Oct 28 2008, 12:03 AM)
I said to my wife tonight, I've never seen a real positive return from my rsp's.



So, the question for me is, is there any way to invest the employer portion (DCPP) in something other than your average mutual fund?


yes, you can open a self directed RRSP (or in your case a locked-in self-directed RRSP) .. and invest in any RRSP eligible investment such as



a) mortgages, or

b) private real estate syndicators like us, or

c) publicly traded stocks, or

d) exchange traded funds (ETFs)

e) bonds / GICs, or

f) mutual funds, or

g) REITs or in shares of publicly traded companies that hold real estate, or

h) call options or covered calls, or

i) money market funds



You must have a trustee that administers the portfolio, but YOU tell then what to invest in. The three most common trustees that do that are: OlympiaTrust, Laurentian Bank B2B Trust or Canadian Western Trust (CWT).

 

[mark186]

One thing about MER`s that has always bothered me, especially when specific funds gain in popularity, is the fact that the MER stays the same regardless of the size of the fund. About 15 years ago the mutual funds industry went through a period of strong growth and I saw funds with $100 million in assets charge a 3% MER. Fair enough I thought, there are costs associated with running this business. However it wasn`t unusual to see people pour money in and the $100 million funds became $1 billion dollar funds but the MER stayed 3%. So the cost to run the business went from $3 million to $30 million. Apparently the mutual fund industry doesn`t recognize economies of scale.

 

[navaz]

Robert Kayasaki put it this way:

You take 100% of the risk, mutual fund companies take 0% or the risk
You put up 100% of the money, mutual fund companies put up 0% of the money
You get 20% of the profits, they get 80% of the profits!

Is it so tough to ask for 50% of the profits from JV partners? Keeping in mind the mutual fund companies make money regardless of the markets-

 

[bigbabba]

QUOTE (navaz @ Oct 30 2008, 12:31 AM)
Robert Kayasaki put it this way:



You take 100% of the risk, mutual fund companies take 0% or the risk

You put up 100% of the money, mutual fund companies put up 0% of the money

You get 20% of the profits, they get 80% of the profits!



Is it so tough to ask for 50% of the profits from JV partners? Keeping in mind the mutual fund companies make money regardless of the markets-






well said

 

[seeu22]

QUOTE (navaz @ Oct 30 2008, 12:31 AM) Robert Kayasaki put it this way:

You take 100% of the risk, mutual fund companies take 0% or the risk
You put up 100% of the money, mutual fund companies put up 0% of the money
You get 20% of the profits, they get 80% of the profits!

Is it so tough to ask for 50% of the profits from JV partners? Keeping in mind the mutual fund companies make money regardless of the markets-


Explain the math behind the 20% - 80% thing. For ease of figuring if a fund returns 7% annually and the MER is 3% that means that the fund profited a total of 10%. The investor is getting 70% of the profit and the fund manager getting 30% of the profit.


Am I looking at this wrong?

Neil

 

[Thomas Beyer]

QUOTE (seeu22 @ Oct 30 2008, 12:26 PM)
Explain the math behind the 20% - 80% thing. For ease of figuring if a fund returns 7% annually and the MER is 3% that means that the fund profited a total of 10%. The investor is getting 70% of the profit and the fund manager getting 30% of the profit.





Am I looking at this wrong?



Neil


if the total (before fee) ROI is 4% .. then 3% is 75% !!

 

[GarthChapman]

QUOTE (seeu22 @ Oct 30 2008, 11:26 AM)
Explain the math behind the 20% - 80% thing. For ease of figuring if a fund returns 7% annually and the MER is 3% that means that the fund profited a total of 10%. The investor is getting 70% of the profit and the fund manager getting 30% of the profit.





Am I looking at this wrong?



Neil




By my math >> 3 divided by 7 = 43%. So the fund manager in your example is getting 43% of the total profits (profits of 7%), and the investor is getting 57% of the 7%, which is a 4% ROI.



Good deal, if you are the fund manager.



And that's why my savings are in mortgages - via an experienced and successful Mortgage Banker.

 

[DonCampbell]

Yes,,,, however....
Mutual Funds have positioned themselves as "make `investing` (using that term loosely here) easy" and sadly the majority of people in Canada do make their investment decision based on `easy` not on actually analyzing, operating and building their net worths. So Mutual Funds will always have an advantage.

They couldn`t charge those ridiculous fees if people weren`t willing to pay them as a cost of `making it easy.`

2nd reason why mutual funds are so popular... it gives the average investors someone to blame if the returns aren`t what they wanted. A lot of people are afraid of taking full responsibility for their investment results (in case something goes wrong and they have to admit a mistake). So, mutual funds know that and get paid to be the scapegoat. We`ve all met people who take no responsibility for their investment - they are the people who repeat the mantras of `Well, I trusted them to do their job" or "I was just doing what my planner told me to do."

Another sad fact is that a lot of people spend more time planning their next vacation than they do planning their financial lives (which would help pay for these vacations).

Congratulations to all of those who DO take responsibility, DO know that with a little effort and a focus on reality that investing can be very profitable in all market conditions (both real estate and stocks).

 

[greghabstritt]

Wait till you guys see some of the information I`m going to present in the RRSP Secrets Program.

I have a financial planner who literally is going to reveal some of the dirty secrets of the financial industry. He`s actually giving up his license and getting out of becoming a financial planner, because he literally feels too guilty about it. He`s writing a book to reveal a lot of the things that the financial industry does do its clients. The entire system is set up that they essentially have to shaft their clients, or they get fired (or go broke). It`s absolutely shocking.

He`s going to share some stuff in that program that`s going to blow a lot of people away. The MER rip-off is just the tip of the iceberg.

 

[TommyK]

QUOTE (greghabstritt @ Nov 21 2008, 07:39 PM) Wait till you guys see some of the information I`m going to present in the RRSP Secrets Program.I have a financial planner who literally is going to reveal some of the dirty secrets of the financial industry. He`s actually giving up his license and getting out of becoming a financial planner, because he literally feels too guilty about it. He`s writing a book to reveal a lot of the things that the financial industry does do its clients. The entire system is set up that they essentially have to shaft their clients, or they get fired (or go broke). It`s absolutely shocking.

He`s going to share some stuff in that program that`s going to blow a lot of people away. The MER rip-off is just the tip of the iceberg.

I used to work in a bank and I did not agree with how they tell their clients to buy the bank`s mutual funds. That`s where the bank makes the most money when clients buy their own funds (hence the high paying fund managers)!. Most bankers are not financial experts; they do not contact their clients when the market is going down down down (like what we are going through right now) to reduce risk. The truth is most bankers are no better than their clients when it comes to investing in paper assets! I believe there`s a point to GET IN and GET OUT. The bankers sure know when to tell their clients to GET IN. But most times they fail to advise their clients to GET OUT. The conflict of interest does not serve the clients well.

This is one reason I do not want to take the advisor position at the bank because I don`t believe in most of the mutual funds out there. Yet, the banks set sales quota so they make money from MER, which a client pays regardless of ups and downs in the market.

Now come to think of it, RSP mortgages are the best to invest in if I had known earlier (and had the time to liquidate my bad performing mutual funds before this ridiculous financial crisis). Or, stick with term deposits and GICs as interest income, which is 100% taxed normally, is tax-deferred in RSPs so the overall performance is ok.

Oh, did I mention this ridiculous so-called stock-market GICs? Banks set limit on how much ROI you can earn per quarter, yet they don`t set the limit you would lose per quarter. And of course as any behavioural economics know, the certainty effect will draw clients to invest as the banks will quarantee your principal in 3 years time. A person is most likely to make nothing and have the bank use their money for FREE in 3 years time.

What a brilliant trick!

I have given up buying most mutual funds. However, buying stocks to diversify your investment is still fine since you don`t pay MER whch reduces your overall performance over time (but you have to know what you are investing in). The worst comes worst, I can hold on to my stock until the prices go up (and I may even get dividends while waiting for the prices to come back up!)