Canadian investors striving for financial independence often seek the wisdom of an investment advisor (the so called subject matter experts). The advisor presents the investor with a choice; choose one of the following options.
The first option is to select from a wide array of guaranteed investment certificates (GIC’s). A GIC is an investment vehicle which guarantees a pre-determined rate of return for a fixed period of time. The return is referred to as “interest payments” and the timeframe is “term to maturity”. Now let us take a GIC with a term to maturity of 5 years paying an annual interest payment of 2%. This guaranteed return does sounds quite enticing but once you take into account the annual rate of inflation (generally above 2%), the return in fact negatively effects your portfolio in the broader sense.
The alternate option investors are given are pre-selected Canadian mutual funds. Now if the investor chooses to go to their financial institution’s advisor, the selection is limited to in-house mutual funds mainly. 77% of mutual funds in Canada under-perform the market in 10 years, 69% under-perform in 5 years (Sources: The Vanguard Group, Inc. calculation). Yet the market value of investments in mutual funds is at a staggering $1.31 trillion dollars as of August 31, 2016 (Source: The Investment Funds Institute of Canada).
To top this underperformance off, most fund managers charge a hefty fee to “manage” the fund. This fee is referred to as “Management Expense Ratio (MER)”. Canadians pay the highest fees in the world for mutual funds. A typical fund would have an MER of 2.42% in Canada, in comparison to 0.82% MER a US resident would pay. That is $2,420 a year in fees on a $100,000 portfolio irrespective of whether the fund grows or shrinks.
Here is an article in the Toronto Star shedding light on mutual funds:
The need for transparency has become of utmost importance nowadays and yet, investors are seen glamorized by false projected returns. The dream of financial independence can only be realized with adequate research and attention to the fine print. Investors must acknowledge the need to know what they are paying for when obtaining profession help.
Sid El Mehdi Lembirik
Lembirik Group Investments