A colleague of mine had invested in index funds through her bank. One of the fund tracked S&P 500. The bank charges 1.25% MER while vanguard only charges 0.08% MER for a similar fund. I suggested that she switch from the bank from bank to a self-directed broker so that she buy the vanguard fund and save 1%. She said that she won’t make the switch to save 1% because she is not greedy! Apparently, I offended her with my advice so I changed the topic of conversation. Lets see if the switch would be greedy or smart.
Management Expense Ratio (MER) is the money a fund manager charges for managing a fund. If you use a broker, you will have to also pay for buying or selling the fund. I use Questrade, which doesn’t charge anything for ETF purchases. ETF is a fund you can buy and sell like a stock. Traditional funds can only bought at the closing price on that day. Banks don’t disclose what they charge on top of the MER, but it substantial as I will explain later. To simplify, lets just compare MER costs. Lets assume that she has $100,000 invested in the fund and will never fund it again for 25 years. Between 1957 and 2018, S&P 500 returned an average of 8% per year. So let’s use 8% as the benchmark.
1% of $100,000 is $1000. Over 25 years, you are losing $25,000 in fees. But remember that the fees have a compounding effect. So lets just plugin the numbers in online compound interest calculator like https://www.getsmarteraboutmoney.ca/calculators/compound-interest-calculator/ . With the bank, her investments will grow to $572,541 and with vanguard, it will grow to $684,848. That is a difference of $112,307, 16% less than what the same investment would make with Vanguard.
So let me get this straight, she puts in 100% of investment, takes 100% of the risk. Yet the bank / fund manager takes an extra $112,307 or her earnings. If it takes 30 min to make an additional $112,307, will you find the time to do it or would be consider it to be greedy?
In reality, the bank will take a much larger portion of your earnings. This is because they have many hidden charges. As an experiment, I invested $1000 through Vanguard and $1000 through my bank in index funds. Three years later, the difference was about 15%. I presented the facts to my banker and neither her nor her manager could explain the difference. The only information they had was what was printed on the fund fact sheet. They are not dishonest people, just part of a dishonest system.
Save 1% in MER fees because it is the smart thing to do.
