Slice Your Way to a More Fruitful Portfolio

06/18/2012 8:30 am EST

Focus: FUNDS

Rob Carrick

Columnist, The Globe and Mail

Let's keep momentum going now that Investors Group says it will lower costs of owning its funds, writes Rob Carrick, reporter and columnist for The Globe and Mail.

The easy way to improve investment returns in tough times: Pay less in fees.

Fees are an unavoidable part of investing, and ideally, they're a fair deal when viewed against the investment returns and advice they buy you. But at times like these, when even well-balanced portfolios are struggling, fees are like a sponge soaking up precious drops of investment gains.

The Canadian investment industry effects an attitude of monolithic obliviousness to fees, but it's just a pose. We know this because Investors Group, one of the largest mutual-fund companies in the country, announced recently that it will cut the cost of owning its products starting next month.

Let's see if we can keep the fee-cutting momentum going. Spend a few minutes this weekend finding out what you're paying for fees and advice, and then assess the value in light of your recent returns. Make changes where required.

Last week's Portfolio Strategy column featured a survey in which a dozen investment industry pros offered their views on returns over the next ten years. Even the optimists see a few tough years ahead as we work through today's global economic problems.

The tough investing environment does seem to have made investors more fee-sensitive. At Investors Group, one of the highest-cost fund companies in the Canadian market, net fund sales came in at $175 million for the first quarter of this year, down from $504 million a year earlier. In the final nine months of last year, more money flowed out of the company's funds than in.

Murray Taylor, Investors Group's CEO, said in announcing the fee cuts that there has been greater consciousness of costs in an investing environment of low interest rates and volatile stock markets. As a result, the company will lower fees by 0.05 to 0.4 of a percentage point on funds accounting for more than two-thirds of its assets.

IG says its fee cuts will take it from the high end on costs to middle of the pack. But this is still a hugely important development, because it shows that fund companies can be influenced by investors who include fees among the factors used in selecting funds. The more investors take their money out of high-fee products, the more pressure there will be to cut fees.

Lower fees won't mitigate the complaint some investors have that fund companies and advisors receive their fees regardless of end results.

I've come across just one exception (glad to hear from readers of any others)-Avenue Investment Management-where the standard fee is 1.5% for accounts with $500,000 or more in assets. In years where returns top 10%, the firm charges a performance fee that adds as much as an extra percentage point in costs to clients. In years where clients lose money, the fee is halved.

"It's about trying to be fair," said Paul Harris, partner and portfolio manager at Avenue. "This is the only industry in the world where you can give somebody subpar performance or do a poor job and still get paid for doing that poor job."

Avenue charged a performance fee in 2005, 2006, 2009, and 2010; it halved its fees in 2007, 2008, and last year. "It hurts us to cut fees, don't get me wrong," Harris said. "Our view has always been, it should."

Ask your own advisor to discuss fees in light of lower returns. Can you expect any willingness to cut costs? "Truthfully, no," Doug Trott, president and CEO of PriceMetrix (a software firm that tracks advisory fees), said in an e-mail. But at least your advisor will understand the importance you place on low fees.

Never let anyone in the investment industry talk you out of the importance of fees in the process of selecting advisors and products like mutual funds.

In The Little Book of Common Sense Investing, index investing pioneer John Bogle uses the example of a mutual fund with a fee of 2.5%. If the fund makes 7%, the fee eats up about 40% of returns; if inflation squeezes the real return of the fund to 4.5%, the fee eats up almost 60% of gains.

"The fact is that lower returns harshly magnify the relentless arithmetic of excessive mutual-fund costs," Bogle writes.

Two clarifications are needed here, the first being that fund returns are reported on an after-fee basis. Unless you're paying attention to fees, you'll never know how much of a bite they took out of your fund returns.

The second is that Bogle is a harsh critic of mutual funds. He founded the US-based Vanguard family of index funds, which are able to charge very low fees because they track major stock indexes and employ no stock-picking fund managers or research teams.

Do-it-yourself investing using index funds or exchange-traded funds is cheap, but it's equally valid to pay more in order to work with an advisor. Either way, the key is to get value in areas such as:

  • Competitive returns: Falling below benchmark stock and bond indexes in the short term means little, but long-term results should be competitive.
  • Risk: Funds and advisors can earn their keep by taking the sharp edges off stock-market volatility.
  • Cost of ownership: Compare what you pay to the cost of other products and advisors (see panel); the higher the fee, the better a fund or advisor has to perform to generate value for clients.
  • Other fees: If you wanted to sell a mutual fund, would you incur a deferred sales charge?
  • Advice vs. sales: Advisors who earn their fees put your investments in the context of a big-picture financial plan that considers your current position and your goals.
  • Confidence: In today's uncertain markets, do you feel you're in experienced, capable hands with your current advisor and with your current investment products?
  • Reporting: Is your investment firm or advisor in the minority that provide account statements with enough information and clarity to assess both the fees you've paid and your returns?

Stock market returns will undoubtedly surge once the current global economic mess is fixed. Get your investing fees in hand now, and you'll keep more of those gains when they come.

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