How Canada’s Banks Let Canadian Investors Down: Part 2 of 7

Most Canadian investors don’t realize that their banks walk all over them—hanging heavily weighted costs on their investment products which can hamper would-be flourishing nest eggs.

We’ve learned the importance of fighting for great mortgage rates, understanding that our banks don’t usually offer competitive rates unless we barter for them.  And we’re starting to learn, slowly, that the same rule applies with our investments.

When it comes to the performance of an overall portfolio, the lower the fees, the higher the long term returns for investors.  The higher the fees, the larger the long term returns for the banks.  It’s our choice.

Today, I’m going to focus on Toronto Dominion Bank. 

And over the course of this series, I’ll examine the comparative returns of what the banks want you to buy, juxtaposed with the lower cost alternatives that you could be buying instead.

Here are two of the most important investment rules:

  1. Diversify your investments
  2. Keep your costs low

Many representatives at the Canadian banks do a fine job diversifying the investment products of Canadians.  But they don’t generally like selling you low cost products.  And not doing so can be highly detrimental to investors.

Assume an equal allocation between the following markets:

  1.  The Canadian stock market
  2.  The U.S. stock market
  3.  The International stock market
  4.  The Canadian bond market

In other words, imagine that your portfolio was split evenly between the above stock and bond markets.  Assume $10,000 invested in each, for a $40,000 portfolio.

Let’s also assume that you invested this $40,000 ten years ago (December, 2001)

Here are the results of the following funds, as they would have performed from December 2001 to December 2011, if $10,000 were invested in each fund.  But remember, it’s the bottom line that we’re interested in.  We’re not supposed to get wrapped up in the performance of a single fund versus another single fund.  We want to know how the total high-cost portfolio will perform, versus a total low cost portfolio invested in the same asset classes.  Here’s the high cost portfolio below.  And it’s the kind of portfolio that the banks like putting together.

Funds

Annual   Hidden Fund Costs

Fund   values on December 15, 2011

Total   Combined Return

TD  Canadian Equity

2.18   percent charged annually

$18,065

 

TD   International Value

2.55   percent charged annually

$4,988

 

TD   U.S. Blue Chip Equity

2.55   percent charged annually

$7,009

 

TD   Canadian Bond Fund

1.25   percent charged annually

$18,092

 

 

 

 

$48,154

 Above, you can see that some of the funds have performed better than others over the past decade.  This is simply because certain markets have outperformed others during the past ten years.  For instance, you can see that the TD  Canadian Equity  fund has easily beaten the TD International Value fund.  This doesn’t mean that you should pile your new money in the funds that have done the best, geographically.  Many people fall into this trip.  The decade that follows could see a reversal in the fortunes of these funds.

There are two important rules in investing:

  1.  Diversify your investments (as we did with the above portfolio)
  2. Keep your investment costs low (which the above portfolio fails to do) 

Now let’s invest in the same geographical asset classes (giving us diversification) while buying funds with lower fees through TD Bank.  These funds are called Indexes.  They’re cheaper, and reams of academic evidence suggest that over an investment lifetime, they will make you much more money than you would otherwise make with a portfolio of the banks’ favorites—the actively managed funds that they wish you would buy instead.

Funds

Annual   Hidden Fund Costs

Fund   values on December 15, 2011

Total   Combined Return

TD   Canadian Equity Index

0.88   percent

$17,594

 

TD   International Index

1.38   percent charged annually

$8,817

 

TD   U.S. Index

0.54   percent charged annually

$7,741

 

TD   Canadian Bond Index

0.83   percent charged annually

$17,069

 

 

 

 

$51,221

Overall, you can see that this lower cost portfolio outperformed the higher cost portfolio:  $48,154 for the higher cost portfolio versus $51,221 for the lower cost portfolio.

Sometimes, an expensive fund can beat a cheaper fund.  You can see an example with $10,000 invested in the TD Canadian Equity Fund and the TD Canadian Index Fund:  December 2001 to December 2011

Fund

Annual hidden fund costs

Initial investment—December 2001

Fund Value—December 2011

TD   Canadian Equity Index

0.88   percent

$10,000

$17,594

TD  Canadian Equity

2.18   percent charged annually

$10,000

$18,065

The more expensive fund actually came out ahead.  Professional fund managers took greater risks to achieve higher returns, and it paid off.  But over a long period of time, it’s very difficult to know which funds will outperform others over the long haul.  And the winning TD fund above is very likely to get caught (and passed) by the lower cost example.

As Princeton University Economics professor Burton Malkiel suggests, the only clear determinant of high performance over time is low fees, not high historical performance.  Looking in the rear-view mirror at yesterday’s winners, as he suggests, is a poor investment strategy.

If it’s unlikely that a high cost fund (in the same asset class) will beat a low cost fund, then the unlikelihood compounds further when we compare an entire high cost portfolio with an entire low cost portfolio.

What if we invest in the same asset classes as above, but we lowered the fees still further?  Yes, my hard bargaining mortgage buyers.  You can do this.

Here’s the same kind of portfolio, with even cheaper TD funds.  These are the funds they really don’t want you buying.  But as mentioned, I’ll eventually show you (in my follow-up articles) how you can do it.

TD’s lowest cost funds are the e-Series funds—the Jedi Knights of the Canadian fund industry.  Build a portfolio with these funds, and you will very likely double the long term returns of the average Canadian over your lifetime.

Funds

Annual   Hidden Fund Costs

Fund   values on December 15, 2011

Total   Combined Return

TD Canadian e-Series Equity Index

0.32 percent charged annually

$18,508

 

TD International e-Series Index

0.52 percent charged annually

$9,255

 

TD U.S. e-Series Index

0.34 percent charged annually

$7,932

 

TD Canadian e-Series Bond Index

0.49 percent charged annually

$17,590

 

 

 

 

$53,285

Let’s have a look at the bottom lines of the comparative portfolios:

  • Portfolio 1 (High cost, actively managed): $48,154
  • Portfolio 2 (Lower cost, indexed): $51,221
  • Portfolio 3 (Lowest cost, indexed): $53,285

For larger portfolios—those exceeding $120,000–you can find an even lower cost option than portfolio 3.  And yes, the returns would be even higher.

But this series is based on building portfolios from scratch, or with less than $120,000 to invest.

Stay tuned, I have other eye-opening data to share in my series.

And of course, much more detail can be found in my book, Millionaire Teacher. It can be ordered on Amazon Canada here,  or on Amazon USA here.

 





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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8 Responses

  1. Great post. Loving this series Andrew.

    While you're picking on TD, I owned some of those funds until about 3 or 4 years ago. I owned TD CDN equity and TD CDN bond.

    I recall during the early 2000s, and mid-2000s, they did rather well for me. Then again, so did everyone else. I started getting out of mutual funds in 2007. Just in time as well 🙂

    I didn't notice the fees as much until I got reading more and "doing the math". I got smart a few years back, ditched my mutual funds and have never looked back.

    As you probably know, I now own a basket of diversified ETFs (XIU, XBB, VWO to name a few) in my RRSP and dividend-payers unregistered. My portfolio isn't perfect, but I'm working on it.

    High mutual funds costs are simply opportunity costs all investors cannot afford.

    BTW – you might want to check out my poem – you're in it amongst other top-notch blogs I follow.

    A very Merry Christmas and Happy New Year Andrew! I look forward to all the great stuff you're going to accomplish in 2012.

    Cheers,

    Mark

    http://www.myownadvisor.ca/2011/12/20/twas-the-ni

  2. Jon Evan says:

    Ah Andrew I like those high bank mutual fund MERs ;)!

    It's of course for selfish reasons. When banks are raking it in then I'm feeling my bank stock dividends will be maintained or even go up! While people are moving into ETFs, in Canada mutual funds still are king. Many people don't like change or many aren't interested at all in investing so if they want to put their money into these high MER bank mutual funds I'll continue to benefit :)!

  3. Daniel says:

    I think we do need to keep in mind that the expense ratios for these e-series TD index funds are climbing quite rapidly. They are currently all higher than the rates used in the above example.

    If they continue to climb this quickly I'll have to move my savings into ETF indexes in a few years.

  4. Hi Daniel,

    Thanks for this.

    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!

  5. Dan Rend says:

    Hi Andrew

    My question is this; I wanted to buy some TD e-series after reading your book, so I checked out the e-series global couch potato whit the MER at 0.44%, so here i go on the TD e-series site and started puting the percentage of all four of the funds recommended and the MER turns out to be 1.69%. Now, there’s my question, i read your part two of seven articles, but somthing is confusing me. Your MER of the e-series in your article is 1.67% and in your answer on daniel’s comment is 0.41% for the four funds your recommending, same as the couch potato. Is there someting i misted along the way or do i have to reread your book(something that i’m doing anyway)

    Thank!

    • Hi Dan,

      Did you add all the MERs up? Otherwise, I can’t see how you could get such a high cost. MER rates are charged on the basis of a percentage invested into each fund. As such, you would pay an average MER of roughly 0.55% (or close to that) for a total portfolio cost with TD’s e-Series funds, and roughly 0.85% for its iSeries funds.

      Cheers,
      Andrew

  6. Dan Rend says:

    Thanks for that fast responce,

    yes i did add up! i’m new at this, so… how do i add up my MER if i say i put up $8000 into a canadian bond td e-series, what would be the math to get to my MER. Is my question relevant?

    • Your MER would be the MER of the fund. If it’s 0.35%, it would be 0.35% of your total, whether you invested a thousand dollars or a million. You need to average the MERs of all your funds to determine average portfolio expenses (if you have equal sums in each).

      Cheers,
      Andrew

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