How Canada’s Banks Let Canadian Investors Down: Part 4 of 7

We’re going to poke a bit of fun at Royal Bank of Canada. 

There’s a great 1709 quote by Alexander Pope, from his Essay on Criticism, which goes as follows:

A little learning is a dangerous thing; 
drink deep, or taste not the Pierian spring: 
there shallow draughts intoxicate the brain, 
and drinking largely sobers us again.

The Pierian spring is a source of knowledge.  Pope suggests that if we drink a small amount from the Pierian spring, we’ll become sophomoric—potentially leading us to trouble.

RBC was hoping to take advantage of shallow draughts when they offered their own brand of low cost index funds. The only trouble for keen, would-be index investors was that the funds weren’t “low cost” at all. 

They were some of the most expensive index funds on the market.

When the funds were introduced, RBC probably hoped that inexperienced investors would sleep-walk into these expensive beauties, ensuring that the banks would make money from investors’ lack of knowledge.

Check out what $10,000 invested in each of the RBC indexes ten years ago would have turned into by December 19, 2011:

Funds

Annual   Hidden Fund Costs

Fund   values on December 19, 2011

RBC   Canadian Equity Index

0.71   percent charged annually

$17,919

RBC   U.S. Equity Index

0.72   percent charged annually

$7,488

RBC   International Equity Index

0.69   percent charged annually

$9,465

Stacked up against RBC’s actively managed flagships: their Canadian equity fund, their U.S. equity fund and their International equity fund, The Royal Bank probably expected their indexes to dramatically lose.

But they didn’t.

Costs matter—a lot.

Even though these indexes had high internal costs (I certainly don’t recommend them) they were still significantly cheaper than RBC’s actively managed counterparts. 

Check the tale of the tape below, assuming that $10,000 was invested in each of these funds, ten years ago:

Funds

Annual   Hidden Fund Costs

Fund   values on December 19, 2011

Total   percentage of underperformance, relative to RBC’s indexed counterpart

RBC   Canadian Equity

2.05   percent annual fee

$17,046

5.1 percent underperformance

RBC   U.S. Equity

2.08   percent annual fee

$7,161

4.5 percent underperformance

RBC   International Equity

2.25   percent annual fee

$7,340

28.9 percent underperformance

 

Who benefits from higher fund costs?

The financial service institutions

Who benefits from lower fund costs?

You

How do you give yourself the highest likelihood of long term investment success?

  1. Diversify your money across different asset classes
  2. Keep your  investment costs as low as possible

Spread the word about this series of posts among your friends and relatives.  And if you haven’t checked out my book, Millionaire Teacher, it explains this investment process.

We all deserve to drink deeply from our own Pierian Springs. 





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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7 Responses

  1. Chris The Truck Driv says:

    Hello Andrew and all my investing friends! Everybody have a Happy Belated Christmas , Cheers and Beers! Sincerely Chris the Truck Driver!

  2. Faithfully spreading the word Andrew!

    "Spread the word about this series of posts among your friends and relatives. And if you haven’t checked out my book, Millionaire Teacher, it explains this investment process."

    Keep up the great series.

    Hope you had a great Christmas and I wish you all the best for 2012!

    Stay in touch!

    Mark

  3. RJ says:

    I am enjoying your blog which I discovered after reading your excellent book recently.

    I am definitely convinced that a low cost passive investment portfolio is the way to go and I am currently holding my equity portfolio across VEA, VTI, VWO and XIC. My fixed income is in high interest savings yielding 3% in a TFSA.

    My parents are in the process of converting to a low cost indexed portfolio and have already transferred their investments "in kind" to a discount brokerage.

    One dilemma they face is how fast to unwind a portfolio of individual Canadian common stocks, Income Trusts, REITs, and Preferred Shares that was set up by a financial adviser that was charging 1% of assets under management to maintain a portfolio of individual securities.

    Tax issues aside (most of the holdings while in a non-registered account are under two years old and overall capital gains are mostly offset by capital losses).

    Since they have already saved the fees on this part of their portfolio the question is how rapidly would you recommend getting out of the idiosyncratic risk of individual stocks. The holdings themselves (otherr than being 100% Canadian) are low beta and relatively diversified.

    Would you sell all holdings over a few weeks using limit sell orders and remaining conscious of the trading volumes and thereby convert quickly to their desired portfolio asset allocation based on the investment policy statement they designed for themselves.

    Or would you unwind the individual positions over a longer time frame and in the process try to sell in a contrarian manner (ie. selling winners and holding losers unless the prospects are clearly questionable (eg. YLO).

    I know you faced this decision with your own portfolio and I am curious how you approached the issue. I suspect one difference you faced is that you switched to a passive portfolio during bull market.

    Thanks for your thoughts.

    • Hi RJ,

      Congrats on going to the low cost portfolio. And pass on my congrats to your parents too!

      When I switched my portfolio over from stocks to indexes (ETFs) I did it all within about 30 minutes. I'm not much of a speculator, so I've never had a limit sell order. By speculating (timing sales) I think you might "win" on one stock, but I believe you'll give it back on another.

      Whether you sell during a bull or a bear market won't really matter (especially if there are no tax consequences) because you're going "market to market"

      In other words, if you sell stocks low, you can then buy indexes (ETFs) low.

      If you sell in a bull market, then you'll be forced to buy (your indexes or ETFs) in the same bull market….unless you try market-timing, which isn't a great idea.

  4. RJ says:

    Thanks for your response. It makes a lot of sense to me and certainly is in accordance with the efficient market hypothesis which I believe in.

    The one thing that had us wrestling with the decision of how to transition to a passive portfolio is that I believe in the advice never to buy an investment that I could not easily understand. And therefore wondered if the corollary might be that one shouldn't sell an investment you don't understand either.

    I can definitely say that the "expected" returns of Income Trusts, Preferred Shares and REITs are less clear to us than Total market cap weighted stock and bond ETFs.

    The fact that the adviser invested them in these types of assets, along with some convertible bonds and warrants illustrates that the investment industry relies on complexity to create an atmosphere were clients do not feel capable of doing it themselves. And this is all done without actually increasing their clients expected risk adjusted return.

  5. P. Barto says:

    Thanks for all of your insight into Canadian Banks! it is amazing to see how our interests are not looked after and how making money for themselves is always on the agenda. But now that Vanguard has come to Canada I would like to invest with them, but I am struggling to find an adviser who I can either trust or will have low comissions/fees . currently I am with Investor's Group, in Winnipeg and my only recourse has been to go to meeting after meeting with advisers trying to find the best fit. Any advice as to what I could do?

    By the way I have read your book cover to cover many times and every time I do I seem to learn something new! Just love it! I feel like a student again!

    • Hi Barto,

      You might not need an advisor. Any interest in just following the strategy outlined in my book's fifth chapter. It's a very simple process.

      If you're not interested in taking that route, you can find a fee based advisor here, I believe: http://canadiancouchpotato.com/find-an-advisor/

      I didn't notice that they had any in your city, but if you contacted one of these companies, they may shed some light on this for you—perhaps they know somebody who could help you.

      Thanks again for the kind words about my book. I'd be thrilled if you write a review on Amazon! You could even just cut and paste what you wrote above! If you can do it, here's the link: http://www.amazon.ca/Millionaire-Teacher-Wealth-S

      Thank you,

      Andrew

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