How Canada’s Banks Let Canadian Investors Down: Part 1 of 7

You might feel a touch of anger after reading this series of articles.

I’m about to show you how much money the average Canadian is paying the big five banks, when trusting the banks to invest their hard-earned investment dollars.  Think of it this way:  If you were to build a $100,000 investment portfolio over your lifetime with actively managed mutual funds from CIBC, TD, Bank of Montreal, Scotia bank, or the Royal Bank, you would likely be giving up half of your portfolio’s potential.   Surely, $200,000 sounds a lot better than $100,000, doesn’t it?

This series of articles will point out where the average Canadian is wasting their money, and in my final column of seven, I’ll explain, very specifically, what you can do about it.

I haven’t committed to this series of articles to make you angry.   Instead, I’m hoping that you’ll be empowered.  You see, as an investor, you’re in a battle with your investment firm.  They have a prime directive that’s different to yours.  Financial service companies have a goal to make money for their firm, and you have a goal to make money for yourself. 

Think about this for a moment:  You can’t blame the banks for wanting to make high profits.  That’s what they’re in business to do.  If you’ve ever haggled on mortgage interest rates, then you know what I’m talking about.  The banks will usually offer a high interest rate, and it’s up to you to barter downward.

Low cost investment products, as a group, outperform high cost investment products.

Your Canadian banks offer high cost products.  But under the wizard’s curtain, you’ll find far cheaper options.  Like the hidden, lowest possible mortgage rate, the banks won’t offer their cheaper products unless you fight for them.  But fight for them you must.  Once you do, you’ll ensure a far greater likelihood of investment success.

I’m going to take you through the investment products of Canada’s banks, while showing you how detrimental costs can be.

Toronto Dominion Bank

TD bank offers some of the cheapest and some of the most expensive funds in Canada.   And if you haven’t taken your advisor to task at the bank, then you’ve bought (in all likelihood) investments that the banks want you to own.

If you wanted to allocate your money in Canadian stocks and Canadian bonds—with an equal representation in each—you would likely look for a balanced mutual fund.

Balanced funds usually have half (or close to half) of their assets in bonds, with the other half in stocks.  Your advisor may sell you one these funds, but they don’t manage them.  Managing a balanced fund (or any actively managed mutual fund) falls to a team of traders who buy and sell stocks and bonds within your fund, as they try to take advantage of economic opportunities.

   But do they do a good job?  Not usually.

The TD Balanced Fund charges its investors a hidden fee of 2.23 percent annually.  This fee is more than double what most Americans pay for their funds.  But few Canadians realize the costs they’re paying, so our banks take advantage of that.

If you had invested $10,000 in TD’s Canadian actively managed balanced fund in December 2001, it would be worth $13,205 by December 2011.

But if you bought TD’s lowest-expense option (costing nearly 2% less per year) you would have turned the same $10,000 into $18,044 if you had invested half of your money in the Canadian stock e-Series index, with the other half in the Canadian bond e-Series index.  These e-Series funds are the cheapest funds in Canada.

That’s nearly a $5000 difference on a $10,000 investment, over just 10 years.

But TD bank doesn’t want you buying these low cost alternatives.  They’re not profitable for the banks.  But I’ll show you, during this series, how to turn their low cost funds to your advantage. 

Small Cost Differences Add Up

Funds

Hidden  annual fee paid by the investor

$10,000  turned into

TD   Balanced Growth Fund

2.23   percent annually

$13,186

TD   e-Series Canadian Stock and Bond Indexes

0.4   percent annually

$18,044


Canadian Imperial bank of Commerce

CIBC also has its flagship balanced fund.  And it’s even more expensive than TD’s balanced product, with an expense ratio (the hidden fee charged to investors) of 2.4 percent annually.

As such, its performance is even worse than TD’s actively managed balanced fund.  If you had invested $10,000 in CIBC’s Balanced fund back in December, 2001, it would only be worth $12,732 by December 2011.

Going with TD’s lowest cost option (the one I’ll teach you to fight for) would have awarded you $18,044 during the same time period.

Please keep in mind that I’m comparing the same asset classes.  The CIBC balanced fund (as with all of the funds I’m comparing) has 40-50 percent of its assets in Canadian bonds and roughly an equivalent amount in Canadian stocks.  But its high cost serves as an expensive anchor to unwary investors.  You can see the comparison below, juxtaposing two options from December 2001 to December 2011.

Funds

Expense   ratio paid by the investor

$10,000   turned into

CIBC   Balanced Fund

2.4   percent annually

$12,732

TD   e-Series Canadian Stock and Bond Indexes

0.4   percent annually

$18,044


The Bank of Montreal and Nesbitt Burns

BMO and Nesbitt Burns joined forces to create their flagship balanced fund in November, 2002.  It charges less than the actively managed balanced funds at CIBC and TD Bank.  As such, it comes as no surprise that it has performed better.  Its annual fee is 1.85 percent, but there’s a liability that doesn’t present itself in my example below.  It has, according to Globefund.com, a sales charge associated with it.  Keep in mind that you should never pay a sales charge to buy a fund—ever.

As with the examples above, the BMO/NB balanced fund has underperformed the lower cost option below.  Here is what $10,000 would have earned you, comparatively, between November 2002 and December 2011.

Funds

Expense   ratio paid by the investor

$10,000   turned into

Bank   of Montreal/NB Balanced Fund

1.85   percent annually (but the fund charges an additional sales fee for each   purchase/investment)

$15,429

TD   e-Series Canadian Stock and Bond Indexes

0.4   percent annually

$18,917


Scotia Bank

Scotia Bank’s actively managed Canadian balanced fund has also disappointed investors, turning $10,000 into just $12,395 from December 2001 to December 2011.

Funds

Expense   ratio paid by the investor

$10,000   turned into

Scotia   Canadian Balanced

1.98   percent annually

$12,395

TD   e-Series Canadian Stock and Bond Indexes

0.4   percent annually

$18,044


Royal bank of Canada

And in case you think the Royal Bank could pull off the nearly impossible, have a look below.

Funds

Expense   ratio paid by the investor

$10,000   turned into

RBC   Balanced

2.35   percent annually

$14,281

TD   e-Series Canadian Stock and Bond Indexes

0.4   percent annually

$18,044

During any given year, an expensive fund could end up beating a lower cost fund.  But over an investment lifetime, the chances of an entire portfolio of high cost funds beating an entire low cost portfolio are extraordinarily slim.

Academically, this is an irrefutable premise, and there are many great books that outline exactly how and why.

My recent Amazon #1 bestseller, Millionaire Teacher, is a great place to start.  Canadians can order it locally here. (Or it can be ordered from the U.S. here.)

Stick with me through this series of six more articles, and I’ll show you more direct comparisons that (I hope) will have you reaching for the telephone—or running off to your local bank to make a few changes.

 

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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20 Responses

  1. Peter says:

    hi Andrew, always enjoy reading your blog. just in the process of dumping alot of my high mer mutal funds, just trying to follow your advise with low fee funds and etfs. in your recent article on the e-series from TD are you saying that they can also be bought at the branch level through an advisor? i'm currently with TD Waterhouse and TD Financial Planning and i'm trying to find some low cost funds for our RESP which is with TD Planning. we've already switched our RRSP and TFSA to the Waterhouse Brokerage and use some of the e-series funds. our kids are 10 &11 and i just wanted to possibly stay with Planning just for the RESP as when we need to start withdrawing the money it may be helpful to have their knowledge to help us out. we currently have TD Monthly Income, TD Dividend Income, Fidelity Monthly Income and Fidelity Asset Allocation. your comments would be greatly appreciated. thank you

    • Hi Peter,

      Unfortunately, the advisors are not allowed to advise on the e-Series products. They have to be bought online, and the reps won't offer suggestions. But at the same time, do you really need their advice? Split your RESP into the Canadian bond e-Series, the U.S. e-Series stock index, the Canadian e-Series stock index and the International e-Series stock index. By the time your child is about twelve years old, ensure that roughly 50% of the assets are in the e-Series bonds. By the time the child is 15, ensure that roughly 75% of the money is in the e-Series bonds, and by the time your son/daughter is of college age, make sure that the money is 100% allocated to bonds.

      What do you think Peter?

  2. If parts 2 to 7 are as good as part 1, I can't wait!! 🙂

    Should be an awesome series Andrew!

    BTW – on an unrelated note, how are the "biggest losers" doing?

    Cheers,

    Mark

    • Thanks Mark!

      I look forward to weaving all kinds of things in this series: bank by bank.

      Thanks for reminding me about the Biggest Losers. I haven't checked them for a long time, but I will!

  3. Great post Andrew!

    It's unfortunate that many investors will never see the light 🙁 I will always advocate low MER funds but in the meantime, I'll buy stocks in the banks 🙂

  4. Peter says:

    Hi Andrew,

    Thanks for the advice and the vote of confidence you have in us, your suggestion makes alot of sense to us. Sorry I didn't mention that our account has 60K and was wondering if you would have suggested the use of some ETFs instead? As far as when it's time to withdraw the money I should be able to do this easily through the brokerage?

  5. Bikedeb says:

    Hi Andrew,

    Just finished your book and I will be starting it again today. I have my money invested with Scotiabank. I have LIRA GIC-21000. and 2 Registered Savings-SSI, one is 16000. and the other is 28000. How do I get my money out, I want to put my money into the stock & bond index, probably the e-series indexed funds from TD. Is there any restrictions because the one is a LIRA? Also how can I purchase the e-series funds online, do I have to cash in the others and what are the implications of that?

    This is a huge learning curve for me but yours is the first book I have read that makes any sense.

    • Hi BikeDeb,

      First of all, what's the significance of your webname? I like it! And there must be a story behind it.

      As for your investment question, here's how you could do this:

      Take all of your current investment statements into TD Bank.

      Tell them that you would like to open similar accounts with them, and they will be able to move the money over, without tax consequences, into the relative type of accounts. It's cool. They'll be able to do the transer at TD bank, without you necessarily contacting your current advisor.

      Ask them to divide your money into the following TD indexes:

      1. Canadian stock

      2. Canadian bond

      3. U.S. stock

      4. International stock

      TD offers all of these indexes. The advisor may try talking you out of it–showing you some actively managed products instead. But stick to your guns.

      These index funds above have expense ratios that are roughly 0.8% per year.

      Once your account is set up, you need to fill in some paperwork to convert your regular TD bank indexes to the e-Series indexes. Here's the online link to the paperwork you'll need to fill out once you're at this stage: http://www.tdcanadatrust.com/products-services/in

      The banks might get a bit awkward with you at this stage, but again, stand your ground.

      Let me know if I can help in any way. Soon, I'm going to write up a blog post on this process. I recently did this with my sister's account, and with my brother's account as well.

      Also, I'd be thrilled if you could write a brief review of my book on Amazon! Here's the link, if you have time. I'd really appreciate it! Thanks! http://www.amazon.ca/Millionaire-Teacher-Wealth-S

      • Debra Hermary says:

        I will be doing exactly as you said. I am so thrilled that you actually answered me, as a newbie I really do need a step by step. I will

        let you know how it goes.

        I will review your book on Amazon. Before I was even all the way through it I had copies sent to my three children and their spouses. I wish I had this info when I was their age.

        Bikedeb is because I am an avid cyclist (from Victoria as well). I have 2 road bikes, a mountain bike and we now own our second tandem which is probably our first love now. We take week long camping trips packing all our camping gear in the bob. These are challenging but rewarding trips.

  6. Hi Peter,

    If your account is valued at less than $120,000 (ish) and you're buying regularly each month, you'll find that the e-Series option is more economical than the ETFs. I believe that my book's fifth chapter shows this comparison in detail.

  7. Wendell Kirk says:

    Why do you need a comment?

    My son Dan thinks your great.

  8. Pawan Wasan says:

    First of all I would like to thank you for an amazing book you have written. Its simple, Entertaining and Informative.

    Well I understand that Vanguard is officially in Canada now (https://www.vanguardcanada.ca). With the same enormous low cost MER that Vanguard US has to offer does it make more sense to buy Vanguard ETFs rather than TD e-Sries Fund.

    Maybe the new comparison will your next book .

    BTW Are you planning to write another book ? Do you have a similar comparisons in the Real Estate Market or how to buy a Business( Franchise or Non Franchise).

    Best Regards,

    Pawan Wasan

    Toronto

  9. Daniel says:

    Andrew just want you to be aware that TD bank has raised their expense rates on those TD e-series funds since your book was published. (maybe they are anticipating a surge of customers buying those funds now?) They are still a good deal though. I just hope they don't arbitrarily raise the rates every year!! Probably you might want to publish a 2nd edition of your book in 5 years or so with all updated bank specific info.

    Thanks, Daniel

  10. Hi Daniel,

    I haven't been able to find the increase expense ratio that you're referring to. I went to the TD website, and of the e-Series funds I recommended in my book: U.S. stock index, International stock index, Canadian stock index and Canadian bond index, the expense ratios average amounted to just 0.41%.

    http://www.tdcanadatrust.com/products-services/in

    If you have found anything different, please let me know.

    Thanks!

  11. Wendell says:

    Andrew

    I have just finished your book that my son gave me for xmas–he was right-you are great-a breath of fresh air in this very complex field.

    In early 2011 I decided to take the bull by the horns & have ago at my own( mutual fund portfolio). I focused on what I know-I am at a gain of 9.5 %.I am pleased with

    my gain but I had planned from the start to get into Index Funds. I have learned

    the hard way over this last year that my past programme is too stressfull for an old

    lad like me.

    Wendell

  12. Bikedeb says:

    I have an appointment at Td bank to move my funds, how should I split them into the funds you mentioned?

    • Hi BikeDeb,

      If you won't be expecting a DP pension when you retire, then buy a bond equivalent that's close to your age: The Canadian bond index. For example, if you're 40 years old, put 30-40% in the bond index. If you're 50, put 40-50% in the bond index.

      Then split the remainder evenly between the Canadian stock index, U.S. stock index and International stock index.

      And make sure it eventually all gets converted to the e-Series index funds.

      Get ready–it won't be easy. The advisor at TD may not want you owning any of these products, so brace yourself for that.

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