Monday, 2 November 2015

Mutual fund MER follow up

Before I get into what I could call the big bang (switching over all your mutual funds to money and then to stocks).  Some co-workers read my initial blog and asked about the following Mutual Fund situations and asked for my comment.

Questions:
  1. Peter, I have a matching RRSP amount at work and I do remember picking the allocation you mentioned when I started work.  Am I still paying the MER at my work mutual funds?  and can I get out of it?
  2. Peter, I have mutual funds in my TFSA.  It is a tax free savings account.  They can't touch me in there.
  3. Peter, I have mutual funds in my Child's RESP, am I paying the MER? and can I get out of it?
  4. Peter, I have mutual funds not at the bank but with a mutual fund company, are their MERs better than the banks, after all I get a dedicated sales person whom I can call direct.
  5. Peter, I never paid any of these MERs you talked about in your blog, I've been with RBC for 20 years and they only take out $11.95 a month and I have my life savings with them.  There is no $10,500 fee a year.  You better come bank with me and choose my mutual funds.
  6. Peter, I have been banking and investing for 20 years with CIBC, what alternative do I have?
All very good questions which is why I got into doing this blog, to help people understand, to help people feel good about their investments.  There seems to be misconceptions out there regarding Mutual Funds, a lot of people still think they are great, after all the Banks will never mislead us, they have branches everywhere, they have clean, sharp employees.  All very helpful.  The banks are banks because they are in the business of making money, they do a good job of it too.  I won't hold that against them but what I do is stand up and shout , the general population needs to educate themselves.  It's amazing how when you think about it, a reasonable person will spend 15 minutes at the store deciding whether to buy the $1.49 toothpaste or the $1.79 toothpaste, yet they will not send 30 seconds on their life savings.  People's bargain hunting sense like when they want the best deal on that Tassimo on Boxing day for $49.99 idealogy is thrown out the window when you have to deal with your $500,000 portfolio.  "Let's just let Johnny Money take control of our money because he has the nicest business card".  Canadians need to wake up and realize that they do have choice.  I was suppose to answer the questions above but I got carried away,  I guess its ok, its a blog.

ONTO the answers:

1. A lot of people have work RRSP or work Pension plans where they match 2 or 3 or even 4%.  I can't even start to explain how this setup is so amazing.  Getting a 100% return on your contribution right away.  It may not break the bank to have this small percentage taken off your pay but a lot of people do not take advantage of this matching from their workplace.  The power of compounding is on your side when you do this.  Yes I know the banks do talk about compounding but it really does work and works better when you don't need to do anything, you are compounding while at work.  The bad news is for your work place RRSP or Pension, they only offer mutual funds.  The funds are usually a 3rd party provider and they usually stress they have lower fees than usual.  So there is no way around MERs here, the best course of action would be picking INDEX funds as these are usually the lowest MERs in most mutual fund groupings.

2. Mutual funds in the TFSA.  Yes, any capital gains, or dividends are tax free in a Tax Free Savings Account, that is correct, but not the fees, someone has to pay to manage the fund, the MER is still being paid in a TFSA.

3. Again, banks love you to open up something else besides an RRSP, here we have the RESP, registered education savings plan.  You put money in and the government gives 20% of your contribution into the plan.  If you set this up at the bank level, they most likely offered GICs and Mutual funds.  Someone has to pay the fund, the MER is still being paid here.  There is a way to not pay MERs in an RESP.  That will be covered later.

4.  It sounds like your RRSP is setup with a company that is not a bank.  Fidelity Investments, CI Financial, Investors group, etc.  Their fees are usually a percentage similar to MERs or a fixed rate.   How can you be sure they are doing what is best for you, can you measure their performance versus the fees they are paid.  Historically, these types of financial advisors charge a lot more than your typical Mutual Fund MER.  They are always a phone call away but that comes with a price.

5.  Amazingly, someone did say this to me.  The only amounts that were deducted were the $11.95 a month from their chequing account which they believed was the fee for banking services, which included their RRSP with mutual funds.  See there is no deduction or line in a statement that shows a dollar amount for fees.  This is very misleading to normal everyday people, they are used to something telling you what you pay.  Go get your car fixed, pay, get a receipt.  Go setup an RRSP with mutual funds, no receipt no deduction.  Has to be somewhere.  Oh they take my chequing account fee every month, that must be it.  Nothing could be further from the truth.  Please read my 1st post, it will explain how fees are collected.

6.  Alternatives?  well that is where I come in.  It took a certain event to trigger my journey into making my money work for me instead of my money working for someone else.

Next blog I will show you how to switch your mutual funds out of MERs and save that $10,500.....