How much are your investments costing you? Investors, and a lot of the investment offers out there like to talk about past returns. That’s not a great indicator of future returns. And on average, by definition, you’re just as likely to underperform the market as you are to beat it. But it gets worse because of fees which take (hopefully) at least average return and start dragging it down and potentially costing you hundreds of thousands by the time you retire. Dean Kendall joins us today to discuss all the fees you might be getting nailed with and how to deal with them. Dean is a financial organizer and the author of the aptly titled book, Stop Paying Hidden Investment Fees.

Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Our sponsor, Borrowell, recently launched their mobile app which makes checking your financial health even easier. The app includes “Molly” Canada’s first A.I. powered credit coach who will make it easy to understand your credit score and give you tips and product recommendations. To sign up got to maplemoney.com/borrowell today. Now let’s talk to Dean…

Tom: Hi Dean, welcome to The Maple Money Show.

Dean: Yes, hi Tom. Great to see you.

Tom: I came across your book first. Normally, we talk about it at the end but can you tell me what your book is quick just because it will set up this show nicely.

Dean: The book I’ve written it’s called, Stop Paying Hidden Investment Fees and the subtitle is, How To Get Unbiased Advice For The Right Fee, so you can reach your financial goals years earlier.

Tom: Great. Let’s start with the negative side of this. There are a lot of fees that maybe aren’t so hidden and people realize these fees exist. Then we can also get into the ones they don’t even realize they’re paying. Maybe we can start with mutual funds where I think most of the fees are probably from. Can you go into some of the different fees and expenses we’re paying there?

Dean: Sure. With mutual funds there’s various ways they can be purchased and that triggers different fees. Some common terms you hear are “front-end load” or “front-end fee,” which is where a certain percentage comes off of the original investment. Essentially, you have less money working for you up-front. Another one is a low-load fee. It charges a certain percentage if you redeem your assets within a set window of time. It’s usually at two to three year period depending on the firm. If you let your money ride for three years you don’t necessarily pay a redemption penalty, but if you had to pull money out in year one there’s an additional cost to do that. The other one that you hear is called back-end load or deferred sales charge. That one is the same as low-load with the difference being it usually runs for a six to seven year period, again, depending on the institution. You’re just penalized a bigger percentage if you pull your money out within that first six to seven years. Those are the sales charges. And, of course, there’s that MER, the management expense ratio that you always hear about. That is really the cost of running the investment. And to make it even more confusing, some are all-in, meaning you pay asset fee. Let’s say something like 2.5 percent. But the compensation is to the adviser may receive a trailer fee within that 2.5 percent. Let’s say it’s one percent. Then the other one and a half is really the management expense ratio to get to the two and a half in this example. That’s a commission type account.

Tom: I had the mutual funds that were two percent plus and back then I thought I was being pretty smart. I was starting to learn about personal finance. I had a job as a financial analyst and I thought I knew this stuff so I was building this portfolio. But by the time I had so many different mutual funds, I was really just creating an index anyways and paying something like two and a half percent on it. So I definitely get the pain of management expense ratio.

Dean: Yeah, absolutely. The other one sometimes isn’t as discussed as much as the TER, the trading expense ratio. That could be in a low-cost over and above the MER. And that’s how often the money managers are buying, selling and trading. And that can be another quarter of a percent that sometimes people don’t realize either. It’s another thing to look out for.

Tom: Is this like the active versus passive deal? Is that what you mean there? That’s the active trading?

Dean: Exactly right. Yeah. The money manager is basically taking on the—I call it the myth of believing that they can time the market or provide better research and therefore they’re buying and selling and shifting the assets around on a regular basis to try to enhance the rate of return. But as a result there are higher fees for that. I guess that’s another argument in the industry; passive versus active. That’s a big one.

Tom: Well, let’s go into that a bit then. What are the pros and cons of both? Or at least what people say they are. Maybe you’re on one side but how does that ballot kind of play out?

Dean: At the most basic level active is higher. A mutual fund is a great example of active money management where there’s a manager that is in charge of doing homework and research on various stocks or bonds or whatever is in the portfolio to try to basically outperform the index. That’s their goal. They’re trying to add value and that’s really the premise to beat the market. The other side is passive. Passive is really matching the market. You’re really just buying the market. You’re not trying to outperform and as a result there is no money manager, per sae, doing the active piece in the buying and selling. Therefore, the costs actually drop down considerably.

Tom: With ETFs… I’m a big fan of these now. What are the expenses around that?

Dean: The expenses are quite low. As an example (in Canada anyway), let’s say Vanguard just to pick a company, their fees could be point one percent and .25 percent and a fraction of one percent just for the MER component. There is no TER because they’re not actively trading so the cost is way, way, way, less than a typical traditional mutual fund that’s actively managed.

Tom: I’ve always like the idea that—thanks to that low-cost and the fact that they are the average, you’re likely to beat a lot of these active mutual funds. So it’s not just about fees. It’s how those fees let you be average, which is fine. It’s not a bad thing in this case.

Dean: Exactly right. Yeah.

Tom: The other one I can think of right now is stocks. If someone wants to invest on their own and go to one of the stockbrokers, what kind of fees are they looking at there?

Dean: Well, I guess there are the full service stockbrokers and some of them might charge you for a trade. It’s kind of a negotiable thing. Some might charge $150 a trade. Some might charge a flat fee for the trade. Other institutions might be a little bit more aggressive. Maybe it’s $50 or $75 a trade. It’s kind of a variable thing. There may be a fixed number on the ceiling as a maximum but you can go lower. Some advisers might even say they’ll cover your trading costs. So it can be quite an array of options there.

Tom: What about the low-costs? I know things like Questrade it’s $4.95 or something like that, right?

Dean: Right. Yeah, exactly. That’s another option for sure. I guess you might call them the do-it-yourselfer investor. By all means, they can go down that path. I’m not sure but I think TD Waterhouse or TD Direct might be $9.99. Or to your point, $4.99. That’s per trade so it’s drastically reduced. I guess the only differential there is advice versus no advice. So whatever that’s worth to the individual. But for the do-it-yourselfer that’s a great way to go.

Tom: I’ve seen it come up before. On ETFs we don’t even have commissions. I don’t think that’s totally true because I believe there are some fees in there still. First of all, when you sell, a lot of the services still take their commission there. I think there’s even some kind of a little trading fee that they do get dinged for even when they’re buying. Now, you mentioned financial advice. This is sort of the other side of it where there can be more fees as well. Where do you stand on this? Is your company all fees only, or is there a commission to this?

Dean: We charge a flat fee for the service we provide. It’s a fixed dollar amount for a set check points and or what we call deliverables. We tell our clients exactly what they will receive on the onset and exactly what it will cost depending on their situation.

Tom: Can we go into a bit of the issues with any of these commission-based advisers? Things like bias (for sure) would be one of my first concerns.

Dean: I guess with certain advisors some are commission-based. So they receive a commission, basically. They have to sell a product in order to get paid. There’s an inherent problem where maybe they’re pushing a certain product that might pay them more. You have to wonder about the fiduciary standard with that. Commission is one method. Another one is fee-based. Fee-based investment methodology is really just a percentage of assets. It’s quite similar to the commission one but it comes back to a percentage of the investable assets. Both models charge a percentage of the portfolio. The other thing people have to be careful of is knowing whether they’re just providing money management for that fee or are there other financial planning services potentially in that cost that they’re charging based on a percentage of assets.

Tom: Do you mean if they’re looking at two services and it is starting to look like it’s going to be the same price going in and seeing the difference between the two? What they’re actually getting for that dollar?

Dean: Yeah, I think that’s critical that they need to understand on the way in because how the industry is structured, there might be one adviser who might charge, let’s just say one percent of assets and all they provide is money management. Then there may be another advisor who could charge that same one percent of assets but maybe they provide some other services. It’s just critical to understand what you’re actually getting because the industry doesn’t have set rules on what the deliverables are and what actually has to be provided for that one percent of assets.

Tom: I don’t mean to keep complaining about my mutual fund experience with banks but I thought that was a financial advisor at the time too. Now I compare it more to like a car salesman. They are there to sell you a product. They are not really there to do much else.

Dean: That’s right. I would agree. I would say the vast majority of financial advisors and planners, unfortunately, are paid a percentage of assets. Because the only way they’re ever compensated is to sell a product, essentially, they’re salespeople. That’s the most simplistic in terms of what a salesperson does. No disrespect, but if they don’t sell a product there’s no compensation and that’s essentially how the majority of these institutions operate.

Tom: In a way there’s nothing wrong with someone being a salesperson. But maybe it’s in the branding. We go into stores all the time and we’re used to this, but maybe there does need to be some kind of rules there that say you’re not a financial adviser, you’re a financial sales associate or something like that.

Dean: Yeah, that’s right. You’re bang on because within the industry I think the current rule is that anyone can still call themselves a financial planner. There are no regulations around that. So what happens is they have that on their name tag and if everybody takes them at face value they think they’re getting proper advice and that’s probably the biggest issue with the industry. CARP, The Canadian Association of Retired Persons and a lot of other organizations are lobbying for the regulators and legislators to kind of get with the program and start protecting consumers more so I think it’s a real issue.

Tom: Are there any other fees that we should be looking out for? Anything I didn’t cover either on the investments themselves or se the services people hire?

Dean: Those are the big ones; the management expense ratios, the trading expense ratios and then also, of course, the component that’s paid for advice by the adviser. One of the other points of clarity (or fuzziness) in the marketplace is CRM2 to came up recently and some of the fees are basically disclosed on an annual compensation report. But the distinction there is that those are only the fees that are paid to the dealer. Those are not the investment management fees. So now some people feel that they have full disclosure. But again, it’s only a fraction of the total fee they’re paying. There’s still confusion in the marketplace as to what you’re paying in total to the adviser for the MER and for all of this is a total. What is that as a number or percentage? It still seems quite fuzzy.

Tom: What are the current rules with that? And as a follow up to that, what would you like to see? Would you like to see a certain breakdown? How do you think that should change?

Dean: Well, I think CRM2 too… I mean it’s a step forward but it’s still definitely suspect. Because again, it provides disclosure on the cost of advice only. The cost of advice is really just what goes to the dealer. That isn’t even a breakdown of what the adviser receives because every dealer has a different payout or percentage that goes to the adviser. That’s the advice component only. But they do not put down anything regarding the cost of the investment product on that annual compensation report. So yeah, that’s a problem. It’s not full disclosure. I guess what I would like to see on your annual statement is a total of everything. What’s going to the advisor and what the products themselves cost as well so that someone can see in one line, the all-in percentage or dollar amount? But right now it’s still only fractional. If the average equity of a portfolio is 2.5 percent in Canada and the adviser is getting 1 percent, the other one and a half is still in cyberspace. It’s not being shown. And the other problem is that they say there is a new sheet called. Fun Facts, that under IROC and NFDA the adviser is supposed to show that fun fact sheet at the time of purchase. But what I found is when I ask clients or people that have been referred to us if they’ve received one of these for every investment that you have, a lot of times the answer is, no. Because it’s not mandatory, advisers are choosing not to produce them. So that’s a real problem.

Tom: As you were saying that I kind of pictured credit cards where on your statement they say if you pay the minimum balance it’s going to take you this many years to pay off. It would be great if they’d say, “If you keep going at these fees are you losing this much by your retirement.” Something like that would probably get people to change their ways pretty quick.

Dean: Exactly, yeah. That’s crazy.

Tom: Let’s go into that a bit. I don’t mean to put you on the spot with this but do you have any examples (even rough examples) of how much this can add up to? Say your retirement is decades away. What is the cost of this? Because, when we talk about a percent here or two percent there it doesn’t sound like a big deal. But I know this can add up quite a bit if you’re 30 and saving up for retirement way in the future.

Dean: No, that’s exactly right. In the book I actually go into excruciating detail with a lot of those examples where it’s only half a percent. When you add this up—and even on $100,000 point five as a percentage isn’t a big number. But when you take it on a half a million or a million and start adding up what that is every single calendar year, when you do a future value on that over the investment lifetime that somebody has—30 years, 40 years, 50 years, it becomes hundreds of thousands of dollars. And in some situations, obviously, millions. It’s just massive. But it’s just these little incremental numbers that people can’t really see or feel. And therefore, unfortunately, they don’t see the real end damage of that. It’s much better to keep that money in your pocket then funneling it into these institutions that aren’t disclosing properly.

Tom: Yes, it sounds kind of similar to the benefits of compounding interest over time except in reverse. You’re losing more and more every year.

Dean: That’s right. It’s massive. Like I say, it’s just small, little, decisions but it ends up being hundreds of thousands. These little decisions are really major decisions and that’s why I think they’re not being tracked or found out as quickly.

Tom: If someone’s listening to show and start looking at their statements and seeing what they’re paying on mutual funds and on an adviser and everything but they want to turn this around, what can they do? In my case, going back to my mutual fund story, I kind of got lucky. It was late 2008 so I was selling before things really started to drop because I was doing the Homebuyers plan. That’s what got me out of them. I just happened to clear most of them out for the Homebuyers plan. And then when I repurchased I started doing it through ETFs. But, if someone wants to change this, what do they do? Where can they start with this? Would they sell what they have? Or would they just continue in a new direction?

Dean: Now, that’s a great question. One thing that we do it’s called, The Truth and Fees Exercise. What it is, is really understanding what you are paying. I think that’s the starting point, basically. Is it fair? Is it reasonable? Or am I paying a premium relative to the marketplace? So first of all you need to ask, “What am I paying?” then understanding what the alternatives are and what that spread or differential is. If it’s a big enough spread or differential then that’s the first trigger to tell you to reallocate or do something different. I think that’s the first piece. The other part is just understanding certain fees can be tax-advantaged, depending on how they’re set up. That’s another important thing; the way you structure your investments. The other thing is passive versus active investing. As we talked initially, you can save massive amounts of money by following a passive investment management strategy versus active which is what I would suggest. I really say active management this is a myth. There are lots of details in the book—third party details that talk about other individuals who don’t have “a horse in the race” who have actually tested this out (active versus passive). The evidence is overwhelming that passive beats active on longer periods of time, bar none. Actually, a gentleman, Eugene Fama, is one individual who talked about that and put that evidence together for consumers. So that’s a good piece to look at.

Tom: For me it was, The Little Book of Common Sense Investing. It really sold me on the idea of passive investing. I can’t remember what his numbers were but it was certainly huge. It was probably like three quarters or whatever where passive would be active especially because of the fees. But also because of people hopping in and out at the wrong time.

Dean: Yeah, exactly. That timing the market thing just doesn’t seem to work, unfortunately. But for whatever reason advisors and/or people sometimes attempt to do it. And, unfortunately, like you said, it doesn’t always work out.

Tom: I’m a little bit guilty but it’s mostly good. I’m still sticking with the ETFs most of the time but I do try to buy on the down points. It’s still timing the market by all means but it’s just trying to get a bit of a sale.

Dean: Yeah, absolutely.

Tom: I’ve never sold, really, so I can’t say what I would do in that case. But I totally get the idea that you can’t truly time the market. I just try (if I have a little extra money) to at least buy when there’s all these things out about an index being down. I figure, “Okay, I’ll get a little more.”

Dean: Yeah, because I guess one of the things that you always hear with active managers every year is something different. There is some reason why you need to be active; Trump’s in the White House, Korea’s this, Iraq is that… There’s always some news story as to why. But every time those news stories come out and the numbers are crunched it’s the same verdict. I think the active management is really just a big sales tool because that’s how all these institutions make their money. They don’t have a vested interest to push passive so they’re not going to hear that.

Tom: I get why people buy into this. It feels like someone’s at the wheel. Why would you just want an index or a robo-adviser or something like that to handle all this when they can have someone doing this full time? I see why people think this is a good idea. But you’re right, the results just aren’t there.

Dean: Yes, absolutely. That’s a great point.

Tom: This has been a great talk on how to get through reducing all these expenses and everything. Can you let people know where they can find you?

Dean: I’m in Calgary, Alberta. My phone number is 403-543-7226. My website is; www.ideal-life-experience.ca. Those are probably the easiest ways to contact me. My email is [email protected]

Tom: That’s great. Thanks for being on the show.

Dean: Thank you, Tom. It was great speaking with you.

Thanks Dean, for running through the various investment fees and how we can avoid them. You can find the show notes for this episode at maplemoney.com/deankendall or head over and check out all the episodes at maplemoney.com/show. Last week I said I’d read out another iTunes review that wasn’t quite so glowing. However, I don’t see it in iTunes so maybe it was removed. I appreciate that, but it was a legit critique. While I don’t have it available to read, it basically said that the show was good but I have a nervous laugh that makes me seem less confident which is a distraction. Now, it’s not lack of confidence but a bit of a habit I do often. Not just on the show, but in real life. I can’t say I can stop it but I will try to reduce it a bit. I’m always looking to improve. Thank you for listening each week. If you can take a moment to leave an iTunes review, I might read yours next. I don’t plan to do it every episode but if your review catches my attention, I’ll give a shout out on the show. I’ll see you next week when Joe Saul-Sehy joins us to talk about the financial “water-cooler” talk we engage in online and how we can make the most of it.