August 8, 2021 | _ _ _ @TB

Recently, in these politically-correct times rife with language cops and SJWs, I was castigated for saying TNL@TB. That, of course, means The Nice Lady at The Bank.

“Your sexist language is offensive to many of your readers,” said an angry email this weekend. “As a father and husband to amazing women, your misogyny is abhorrent.”

Wow. And here I thought the m-word meant hatred of females. I guess the guy ragging on me missed the ‘nice’ part, or the fact most client-facing bank workers have traditionally been women. Because they’re, well, nicer.

Anyway, it’s a new age. Hundreds of bank branches that closed during the pandemic are not reopening. Ever. Covid dramatically accelerated the use of online banking with millions downloading financial apps and losing the habit of going into an actual building. The last 18 months have created a lot more space between bankers and clients, so now TNL@TB (sorry) isn’t dishing out advice on what to put into your TFSA, paying your electric bill or updating your savings pass book. The bank’s on your phone now. And, like Millennials and Zers, you may never physically visit the green, blue, red, purplish or gold place again.

This brings us to investing. For decades bank staff (all genders) have guided their flocks into proprietary mutual funds. In fact as of this week, Canadians own $669 billion in funds, mostly inside RRSPs and TFSAs. That’s more than double the amount in ETFs, or exchange-traded funds ($307 billion).

What’s the difference?

Two things to remember. First, ETFs are traded on the stock exchange while mutual funds are not. Not only does this mean more price fluctuation for exchange-traded funds, it also means greater liquidity. You can move in and out with the click of a mouse, whereas mutuals are typically valued only once a day and there’s a slow process to get in or out. (In fact mutual fund investors can sometimes be prevented from selling in extreme market conditions.)

Second, ETFs cost less. A helluva lot less. The average equity-based mutual fund has a MER (‘management expense ratio’ = fee) of at least 2%, which is ten times higher than the embedded fee on a similar ETF. Across an entire balanced portfolio containing maybe a dozen exchange-traded funds, the fee might amount to just twenty-five basis points (0.25%).

Why do mutuals cost so much more?

Many of them employ fancy-pants managers who try to buy and sell holdings in order to increase returns for investors. Sadly, 90% fail to beat the market. But they still get paid enough to buy Porsches and learn to strut like peacocks. In addition, the person (all genders) who sold you the mutual fund (at the bank) receives a trailer fee. This is a monthly or quarterly income stream intended to compensate the ‘advisor’ (really a salesperson) for providing ongoing service to the client. (When was the last time that every happened to you?)

Also worth noting is these fees are buried and hard to discern. A recent report (last week) found only 23% of investors could identify the ongoing cost of their assets. That’s not cool. And, worse, mutual fund fees aren’t deductible from taxable income, the way money paid to a fee-based advisor, who builds an ETF portfolio, may be.

Over time, paying 2% or more in after-tax dollars to own a fund that underperforms the index is probably a really bad idea. And yet (as I said) Canadians have $669 billion in mutuals. That is thanks largely to TNL@TB (sorry). Decades and decades of ‘free advice’ dispensed by front-line bank employees have led to this situation, costing households untold hundreds of millions in extra charges and poor returns.

ETFs, remember, do not try to beat an index. They reflect them. One fund, for example, may provide exposure to the 500 biggest companies in the US, or hold a basket of the best preferred shares, or high-quality real estate investment trusts, or a collection of corporate bonds. That explains the low cost (getting lower all the time) while the valuation is 100% transparent and immediate because of where they trade. And unlike a mutual fund, in which the manager may sell assets creating a taxable capital gain to investors, there are no surprises with an ETF.

Mutual fund costs in Canada are among the highest on the planet. In fact, in some places, like the UK, those trailer fees paid to TNL@TB (sorry) have been banned. Meanwhile in this country trailers are even paid to discount brokers who never provide advice, a situation which will continue until next year. Shameful.

Things might change now that the mutual funds regulatory agency is merging with the one overseeing fee-based advisors, stock brokers and all the big investment firms. But not soon. Too many people are making too much money on the backs of too many unsuspecting investors.

Don’t let that include you. Give her a call. Sorry.

Garth Turner August 8th, 2021

Posted In: The Greater Fool

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