Tuesday, February 23, 2021

The Great Thing About Managing Other People’s Money

The great thing about managing other people’s money is that you can dip into it to pay yourself.  This might sound unethical or illegal, but it’s perfectly legal if the owners of the money agree to it.  I use the word “agree” in a technical sense here; you really just have to get people to sign a document that points to other documents that bury the details of how you pay yourself from their investments.  You might think that once people notice some of their money is missing, they would become wise to your scheme, but most people don’t notice.  You might think that once such schemes are exposed in the media, people will see that they’ve been had, but most people who read essays like this one just don’t believe it applies to them.  The sad truth is that millions of Canadians allow others to take their money this way.

Average Canadians invest much of their savings in mutual funds, segregated funds, and pooled funds offered by banks, insurance companies, and independent mutual fund companies.  The bulk of these savings are invested in funds whose managers dip into the funds to pay themselves and their helpers at a rate that will consume between one-quarter and half of investors’ savings and investment returns over 25 years.  This fact seems so incredible that most people will feel sure that it is wrong or at least that it doesn’t apply to them.  But this draining of Canadians’ savings is real.

There are laws that require sellers of funds to disclose how much they take out of people’s savings each year.  For example, when you first bought into a fund, you might remember receiving a large document called a prospectus that you found to be incomprehensible.  Don’t feel bad; it’s designed to be incomprehensible because it contains news you wouldn’t like that might stop you from buying the fund.  At least once a year your account statements have to include information about fees that get deducted from your savings, but these disclosures are often confusing, and they don’t have to include everything you pay.

You might wonder how it’s possible that so much of your money disappears without you noticing.  The key is that it slips away a tiny bit at a time.  If out of every thousand dollars you have saved, just one dollar disappears each month, over one-quarter of your money will be gone after 25 years.  Make it two dollars per thousand that disappears each month and almost half your money will be gone in 25 years.  You may have heard that the fees taken out of your savings are some small-sounding percentage like two percent.  This isn’t two percent of your investment returns; it’s two percent of all your savings that disappears every year.  Over 25 years, this builds up to almost forty percent of your savings and returns gone.

Can’t mutual funds make up for their fees with great returns?  In general, no.  It’s nearly impossible to make up for draining away one-quarter to half of your savings over 25 years.  Every year there will be funds that do well.  But the next year different funds will do well.  Over 25 years, most funds are just average, and investors who jump from fund to fund rarely improve the situation.  The typical investor will end up with about average returns over 25 years before we account for the quarter to half the money carved away by fund managers and their helpers in fees.

Why don’t we hear more about this issue?  Much of the media, including bloggers and other financial commentators, depend on revenue from banks, insurance companies, and other businesses that make large profits from the status quo.  This isn’t a conspiracy; it’s just a normal tendency to avoid biting the hand that feeds them.  There are strong voices getting the message out about the damaging effects of high fees, but they tend to get swamped by advertising messages.

Is there anything Canadians can do about this drain on their savings without having to learn the intricacies of the stock market?  The answer is yes.  One very easy approach is to use a robo-advisor.  Another is to find one of the few mutual funds in Canada that charge much lower fees.  This requires some research into robo-advisors or lesser-known mutual funds, but it reduces the drain on your savings and returns to ten to twenty percent over 25 years.

There are even cheaper ways to invest your savings without having to learn how to pick stocks, but they aren’t widely advertised.  There are a few funds called all-in-one Exchange-Traded Funds that are inexpensive and widely diversified in global stocks and bonds.  Such funds will consume only about six percent of your savings and returns over 25 years, but nobody is breaking down your door to sell them to you.  To invest in these all-in-one funds, you first have to learn enough about them to be confident in holding them for the long term through thick and thin.  Then you need to open a brokerage account and learn to buy them.  The process isn’t complex, but it takes some nerve at first to click the button to put thousands of dollars into a fund.  The easier path is to shake the hand of a smiling mutual fund salesperson if it weren’t for the pesky problem of giving up one-quarter to half of your savings and returns over 25 years.  One of the most challenging parts of lower-cost investing is avoiding acting out of fear or greed as the stock market gyrates, something that an expensive financial advisor may or may not help you with.

Managing other people’s money is great for the managers, but not so great for investors if fees are high.  The status quo is unlikely to change much until more investors learn about the fees they are paying.  Some Canadians are waking up to better ways to invest, but the old high-cost mutual fund model is still going strong in Canada.


  1. Interesting article. Way back in 2001 I read the book "The New Investment Frontier: A Guide to Exchange Traded Funds for Canadians" by Howard J. Atkinson, Donna Green and heard Mr Atkinson give a presentation at a conference about ETFs. This was a turning point for me to become a DIY investor.

    As you mention, it is really hard to understand and see the crazy fees being charged if you are just looking at the most recent quarterly or yearly statements.

    1. Hi Joel,

      For me the first introduction to low-cost indexing was the 1997 book, The Motley Fool Investment Guide, which is funny given that they were dedicated to beating the market back then, and I'm not exactly sure what they've become now (other than annoying). It took me a long time to finally make the switch.

      This article is my latest attempt to help a very broad range of readers understand the problem and the fact that it really does apply to them. I realize that most of my readers already understand these issues well, but I wanted something to be able to point to for others I meet.

  2. It would be fantastic if you could send this post to every High School Principal in Canada so they could teach the kids about investing.

    1. Hi Gary,

      I'd be thrilled to get a wider audience for this particular article.

    2. My 'aha' moment came when I realized that my mutual fund salesman (wrongly called an Advisor) knew no more than me about picking mutual funds. I saw it when every year he advised me selling some fund to buy another. The only problem was that the new fund did not do any better than the old one. I went to very low cost ETFs and for the last seven years have enjoyed so much better results. I urge anyone with mutual funds to sell them and buy the most simple ETFs

    3. Hi Bob,

      There are many poor "financial advisors" out there who are really just mutual fund salespeople. Most of them don't know any better (at least when they start) and they invest their own money in bad mutual funds. As some wise up, they typically leave financial work entirely, find a new employer where they can treat their clients better, or embrace the fact that they are treating their clients like marks. Typically, the higher-ups in bad financial organizations have fully embraced the treating of clients like marks.

      There are a some good mutual funds in Canada, but most are bad. You can tell the difference by the costs. If you're having a hard time figuring out your costs, it's a sign that you're in bad mutual funds.

  3. Great article Michael! About 1 year ago I finally started researching my investments and the fees I was paying buying into a Mutual fund at one of the big banks. After discovering how much money I would lose to fees over 40 years, it was an easy decision to switch. Before I did, I asked my advisor at the time about the 2% fees I was paying and why wouldn't I move it to a robo-advisor. His answer was weak at best, basically saying that index funds are more risky than mutual funds and they will never beat the market....blah blah blah. So I moved to a robo-advisor for about 4 months until I because comfortable with buying one of the all in one ETFs for the next 25 years. I completely agree with what you are saying with it is a little nervous to buy that first share of an ETF, but now I will never look back. I've tried to discuss this topic with friends and co-workers but many feel complacent with the status quo, or the reluctance to do their research to see how much they are losing in fees.
    Anyways, thanks again for the article!