What would you do with an extra $250,000?
Would you choose to travel to a new exotic location every year for 20 years?
Would you buy a vacation property?
Would you buy ski passes for the family for life?
Would you give your kids a leg up by giving them a generous down-payment for their first house?
Would you and your spouse retire a few years earlier?
Would you like to make a generous donation to a good cause?
Would you chuck it all and move to a deserted beach in the Galapagos with your imaginary pet heron?
Would you give it all to your bank’s mutual fund department or to a financial advisor in fees?
It’s hard to imagine what the future will bring or what your preferences will be so many years down the road. Perhaps there will be something else you’d like to do with that money that you can’t even imagine right now. Perhaps you’d rather just focus on living in the moment and not worry about the future. Irrespective, I imagine you already have a clear answer to one of the above questions. Unfortunately, despite your answer, you may already be answering yes to this last question, possibly even unwittingly.
Where does $250,000 come from? An illustrative example using a Canadian 35 year old couple, each making maximum contributions to their TFSAs over the next 30 years with a starting balance equal to their maximum contribution room to date of $36,500. Based on their chosen investments they expect to earn 7% per year. The miracle of compound interest and the tax free return characteristics of the TFSA means that if they stay disciplined and their return expectations come to bear they’ll have a very nice TFSA balance by the end of the period. One of the biggest impacts on that end balance other than the rate of return and the discipline to stay the course over the whole period is the level of fees. If they choose to invest in a traditional actively managed mutual fund through their bank or mutual fund advisor they might pay fees of 2.5% or even more. Alternatively they might choose to seek advice from another advisor who would advise them to invest in lower cost mutual funds or passive ETF’s. Let’s assume that as a result they are able to lower their overall fees to 1.4%. Again this is an illustrative example but not unrealistic. The evidence suggests the couple is better off by doing the latter, roughly to the tune of the fee differential. In this case that fee differential is close to $250,000 over the course of the 30 years period. $250,000! That is not the balance at the end of the period – that is the incremental amount in fees they would pay with the traditional higher cost mutual fund strategy over a lower cost strategy.
The amount could be higher or lower. Inflation adjustments to the TFSA contribution limits could mean higher future nominal figures, and an even higher fee differential, all else being equal. If TFSA contribution limits are raised in this year’s budget, and the couple has the ability to increase their investment amounts, there would be even more at stake. Fees can be lowered even further.
Planned and future regulation on fee disclosure requirements might help Canadians understand this better – in the meantime, please do your best to understand how and how much you’re paying for investments and investment advice.
Feel free to contact Chalten for an initial consultation and evaluation of your current fees.
Please note the above example is illustrative and does not represent the performance of an actual investment.