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My latest MoneySense Retired Money column looks at a press release slated for release next week from discount brokerage Questrade Inc. You can find the full column by clicking on the highlighted headline: Canadians are still paying too much in investment fees.
According to the RRSP study commissioned by the independent discount brokerage (a copy of which was provided to me in advance) finds 87% of Canadians don’t know or underestimate the difference that a 2% or 1% fee has on their portfolios over the long run (of 20+ years).
While the majority think Canadian mutual fund management expense ratios (MERs) are too high compared to the rest of the world, given the increased regulatory climate of greater disclosure, I was surprised by the finding that almost half of mutual fund investors still don’t even know what they’re paying for mutual funds.
There are also disturbing generational differences. According to Questrade, 28% of Canadians agree that paying more for an investment will give them better returns. That’s in contrast to the operative principle behind the surge in indexing and ETFs that “Costs matter,” and the lower the costs the better. Yet Millennials seem ripe for the picking here: 42% of investors aged 18 to 34 believe paying more for investments will give them better returns (vs just 18% of the 55+ cohort).
Or as the teaser under the main headline at MoneySense puts it: Millennials and Gen Z missed the memo on how much management fees erode returns over the long term, according to a new Questrade survey.
Questrade estimates a 1% decrease in fees over a typical 30-year investing horizon could result in 27 to 29% more money in one’s retirement kitty, assuming a 7 to 8% return in a tax-sheltered account and a portfolio between $1,000 and $50,000. But try telling that to the group of investors Questrade polled: 87% either didn’t know or underestimated the difference a 2% fee makes versus a 1% fee’s impact on the value of their portfolio over the long run. 41% think a 1% cut in fees adds 20% or less to the long-run value of their portfolios. And only 43% of RRSP investors believe cutting fees from 2 to 1% will have a big impact on returns over 30 years.
Questrade notes that on average we still are paying 2% or more in fees, which “are some of the highest fees in the world.” It cites this research from Morningstar.com, which looks at fees in 26 countries worldwide.
47% of mutual fund investors still don’t know what fees they’re paying
I find it shocking that a whopping 47% who invest in mutual funds still don’t know what fees they’re paying. A majority (52%) think Canadian mutual fund fees are too high but a third don’t know if a 2% fee for a mutual fund should be considered high.
Clearly, there’s still a long way to go to achieve broad awareness of these issues: 76% of those who don’t know what fees they’re paying for mutual funds agree they are a good way to invest for retirement. Here I’d add that some indeed are: see my recent MoneySense column on the best mutual fund companies you’ve never heard of.
The poll finds 95% don’t know that most mutual funds have been underperforming the last 5 years, or underestimate the extent of the underperformance. Questrade cites the SPIVA scorecard to underline the point that active management continues to lag low-cost indexes, which you can find here.
