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

The TD e-Series Index Fund Solution

Tyler and Adam Benn are pictured above, emptying their jar of saved coins and bills to invest in TD’s e-Series index funds. 

Seven year old Tyler refers to them as “insect funds” but there’s nothing juvenile about the products he and his nine year old brother are buying.  Their investments will easily outperform the accounts of most Canadian adults, who usually fall for the much more expensive products typically sold by the Canadian banks.

What’s Wrong with Canada’s Mutual Funds?

 Canada’s financial institutions, according to the mutual fund research firm, Morningstar, charges Canadians disappointingly high fees.  In a global study of comparative fund costs, Morningstar states that:

 “Investors in Canada and Japan typically pay between 2.00% and 2.50% for equity funds. We encourage fund companies in Canada and Japan to lower their fees and expenses for the benefit of the investors.” (Morningstar)

 Morningstar is the world’s most respected mutual fund data company.  And their study gave Canadian financial institutions a failing grade.

 Similarly, when Ajay Khorana (Georgia Institute of Technology) Henri Servaes (London Business School) and Peter Tufano (Oxford University, National Bureau of Economic research) teamed up to compare mutual fund costs around the world, they also demonstrated that Canada’s costs were easily the highest among the extensive multi-country study.  They reported their findings in the article “Mutual Fund Fees Around the World” which was published in The Review of Financial Studies by Oxford University Press.

Why Should You Care About High Investment costs? The Lower the expenses, the higher the returns

Over an investment lifetime, portfolios comprised of  low cost funds are statistically far better performers than portfolios comprised of  high cost funds.  Costs matter, a lot.

Assume, for instance, that Tyler invested $50 per month in the average Canadian stock market mutual fund, and assume that the Canadian stock market averaged (including reinvested dividends) 8 percent a year over the next 53 years. Tyler would pay hidden mutual fund fees amounting to roughly 2.4 percent annually.  After deducting the average Canadian mutual fund fee, he would end up making roughly 5.6 percent annually. Here’s what Tyler’s money would grow to:

• $50 per month compounded at 5.6% per year for 53 years = $191,834.77

Assume that his brother, Adam, invested the same $50 per month for 53 years in TD’s e-Series Canadian index.  If the markets averaged the same 8 percent over 53 years, Adam would pay a hidden fund cost of just 0.33 percent, giving him a return of 7.67 percent annually. Here’s how it would look for Adam:

• $50 per month compounded at 7.67% per year for 53 years = $414,703.98

 Small costs add up.  

And the only reliable predictor of future fund performance is the expense ratio of the fund:  the lower the cost (expense ratio) of the fund, the higher the probability of decent future returns.  Don’t be fooled by a salesperson or advisor who recommends an actively managed mutual fund based on its strong historical track record.  After all, you’re interested in the future, not the past, and studies have shown that looking for historically strong performing funds is a silly way to pick funds.

In the Wall Street Journal’s article, Low Fees Outshine Fund Star System, writer Jane J. Kim cited another Morningstar study demonstrating that low costs, and not past performance numbers, are the best indicators of a fund’s future returns. 

Canada’s high mutual fund costs, unfortunately, spell mediocrity (or worse) for Canada’s investors.  But Toronto Dominion Bank offers a silver lining…sort of.

 TD’s e-Series index funds are the cheapest mutual funds in Canada.  They’re the funds that Tyler and Adam Benn recently purchased, with their mother’s help.  But many people believe that the top brass at the TD Bank don’t really want you buying them. 

The Conspiracy Theory

The theory behind TD bank’s reluctance to showcase these cheap index funds (while enthusiastically selling its expensive fund alternatives) has many creative heads a spinning.

• Why, for instance, does TD Bank make e-Series indexes so difficult to purchase? 
• Why haven’t many of their investment advisors even heard of e-Series indexes?
• Why are many TD advisors so reluctant to purchase index funds of any kind for their clients?

The word “conspiracy” might be a bit strong.  The word “business” is, perhaps, a better choice.  The banks aren’t interested in playing Mother Theresa, and nor should they be.  If the average Canadian investor willingly pays high mutual fund costs, you can’t blame the banks (entirely) for that.  Nor can we fully blame TD bank for making its lower cost products less accessible, when the bank makes more money selling higher cost products.   

In Rob Carrick’s Globe and Mail article TD’s e-Series Funds, Easy To Love, Hard To Buy, he interviewed Tom Dyck, head of the mutual fund department at Toronto Dominion Bank. Somewhat apologetically, Mr. Dyck suggested:

“The reality is, we haven’t made it easy for people to buy them [e-Series indexes],…” (Tom Dyck, TD Bank Mutual Fund Department Head)

But if 7 year old Tyler and 9 year old Adam can purchase e-Series indexes (with help) then you might want to follow their lead.

I’d like to tip my hat to a financial advisor at one of TD’s Victoria B.C. branches.  She’s responsible for helping Sally set up e-Series index fund investment accounts for her sons.  I went with Sally, Tyler and Adam when they opened their account, to ensure that the process went according to plan.  Many new investors, after all, get talked into buying expensive mutual funds by advisors.  But I have to admit that the advisor we dealt with, whom I’ll refer to as Jill, was superb.  When I asked her, initially, if I could use her real name in this article, she happily agreed.  She knew my criticisms of the Canadian mutual fund industry and understood my article’s theme.  I was very impressed by Jill’s willingness to help.  But when I emailed my article’s first draft to Jill, she responded:

 “I really appreciate how favourably you wrote about me, but for the amount of people that read your blogs I just don’t want to get in trouble from TD.”

 Jill’s decision to omit her name might be a wise one.  Would she really get into trouble for helping some clients buy lower cost funds?  I don’t know.  But her fears were somewhat telling.

Here’s how Jill helped us to buy the e-Series funds.

• Step 1

Sally called Jill and set an appointment, suggesting to Jill that she would like to open investment accounts of e-Series index funds for Tyler and Adam. 

Jill prepared the following paperwork for Sally to fill out.  If you want to save time, you could fill the form out yourself, ahead of time, and bring it down to your branch after making your step 1 intentions very clear:  You want to invest with e-Series index funds.

• Step 2

To invest in TD Bank’s e-Series indexes, you may actually have to buy their more expensive indexes first.  They’re called the Investor Series indexes.  I realize how bizarre this sounds:  you want to buy the low cost e-Series indexes, but you must jump through a hoop and buy the more expensive Investor Series index funds first.

 Don’t worry, you can immediately wander to the back of the shop and exchange them (after some paperwork filing) with the better products in the dark storeroom.  But this is a hoop you’ll have to jump through. 

For a diversified portfolio, you could divide your money in the following Investor Series indexes:

• TD Canadian Bond Index Fund
• TD Canadian [stock market] Index Fund
• TD International Index Fund
• TD U.S. Index Fund

Again, don’t sweat it. 

If all goes according to plan, these expensive Investor Series indexes will be converted to e-Series indexes in less than two weeks, after the additional paperwork is submitted and processed.

If your child is investing through a custodial account (they must be 18 years of age for an account in their name) then they may choose to skip on the bond index until they’re older.  After all, they have plenty of time to recover from market drops, before their retirement.

For older investors, without an upcoming pension fund to look forward to, you may want to have a proportion of your account in the bond index which is roughly equivalent to your age.  For example, as a 41 year old, roughly 40 percent of my portfolio is in a Canadian bond index.  If you have a higher tolerance for risk, you could lower the bond portion slightly.  For example, if you’re 50 years old, with a high risk tolerance, you may want just 30 percent of your portfolio in the bond index.

You can see the Investor Series funds, below, alongside the cheaper e-Series products.  Note that most of the TD Canadian Investor Series index funds are twice as expensive as the e-Series indexes, when comparing their respective expense ratios.

I’ve wandered into more than a dozen TD banks in Victoria and Greater Vancouver, accompanying friends who want to invest in either the Investor Series indexes or the e-Series funds.  Jill was the only TD advisor I’ve met who didn’t fight the request. 

Don’t forget, the bank’s reps will try to sell you their actively managed funds first. 

If you battle a bit, you can generally talk them into getting you the Investor Series indexes. 

From there, with a bit of arm twisting, you can get the e-Series paperwork underway.  It won’t be easy.  Most of the advisor will fight you a bit.

Jill saved us such headaches, allowing us to purchase the expensive indexed products, setting up automatic monthly deposits into them, and then giving us the paperwork to convert the Investor Series indexes into cheaper e-Series indexes.

When Sally, Tyler and Adam left the bank, they were the temporary owners of the Investor Series Indexes.  

But once the paperwork was filed and the transfer from the expensive Investor Series indexes to the e-Series indexes took place, Sally received a phone call from Jill to announce that her sons finally owned the elusive e-Series funds.  They’re exactly the same as the Investor Series indexes but TD charges lower hidden costs for the e-Series funds.  Tyler and Adam’s investment deposits—which were initially allocated towards the Investor Series Indexes–will now be identically allocated to the e-Series index funds instead. 

Jill did make one thing very clear, however:  She wouldn’t be able to give any advice on the e-Series products, once Sally and her boys decided to purchase them.

Fortunately for Sally, Tyler and Adam, they won’t need investment advice.  

They’ll contribute to these low cost products and spank the long term returns of the actively managed portfolios offered by Canada’s big five banks.

After all, when the boys empty their piggy banks to make intelligent investments, they don’t want the banks profiting at their expense.

For more information on index fund investing, please check out my international bestselling book:  Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.

The Previous Posts: 

1.    How Canada’s Banks Let Canadian Investors Down: Part 6 of 7
2.    How Canada’s Banks Let Canadian Investors Down: Part 5 of 7
3.    How Canada’s Banks Let Canadian Investors Down: Part 4 of 7
4.    How Canada’s Banks Let Canadian Investors Down: Part 3 of 7
5.    How Canada’s Banks Let Canadian Investors Down: Part 2 of 7
6.    How Canada’s Banks Let Canadian Investors Down: Part 1 of 7