Building a low-fee portfolio that lasts

No more high-fee Canadian equity mutual funds. It’s time for a new portfolio that delivers more income and better returns with less risk

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From the November 2014 issue of the magazine.

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Edward and Penelope Arneson of Cochrane, Alta. (Photo by CHRIS BOLIN)

Edward and Penelope Arneson of Cochrane, Alta. (Photo by CHRIS BOLIN)

THE PROBLEM

portfolio_makeover_before_Nov14Cochrane, Alta. residents Edward, 60, and Penelope, 58, retired five years ago. Ed feels grateful to his former employer for his defined benefit pension plan, but he doesn’t feel that way about his adviser of 25 years. “We’re getting mediocre returns—we’re not even hitting the benchmarks,” he says. “We want a change.” Their portfolio includes $250,000 worth of Imperial Oil shares as well as registered and non-registered mutual funds. Their holdings are mostly in funds charging 2.2% in fees, with a whopping 80% weighted in Canadian equities. Their goal? “More income, more tax efficiency, and less fees.”

THE FIX

Calgary money coach Tom Feigs says the Arnesons first need to adjust their asset allocation. Right now, their after-tax guaranteed income for life from Ed’s company pensions is $58,000 annually (indexed to inflation) and will bump up to $78,000 when Ed turns 65. If they can get an average annual 4% return on their portfolio, the couple can easily supplement their lifestyle up to $95,000 in income per year to age 95. However, says Feigs, “they need to moderate their 95% exposure to equities soon to reduce volatility and risk, as well as lower the percentage they hold in Canadian equities to 30% from 80%.”

As well, Feigs thinks the fees the couple are paying are excessive. “Any savings in fees boosts returns year after year by thousands of dollars.” Feigs outlines two options. The first is to build a passive portfolio using exchange-traded funds (ETFs) charging just 0.5% or less annually (as shown above)—“but that will mean doing the investing themselves.” A better choice, he says, may be to open an account with a low-fee mutual fund investment firm such as Leith Wheeler or Mawer. These firms will build and maintain a portfolio made up of their own low-cost mutual funds for about 1.2% in fees. Either way, he says, the Arnesons should aim for a portfolio split of 50% equities and 50% fixed income. “This will reduce risk while maintaining a reasonable return.”

To keep taxes low, they should split Ed’s company pension and move funds to their TFSA accounts as the contribution room grows.

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6 comments on “Building a low-fee portfolio that lasts

  1. Tom, how can you give advice to people purely around “Low Fees”? Yup, 2.20% is pretty high and if they were not getting any service or Financial Advice from an Advisor then they are not getting any value. ETF’s and Index funds are passive and offer no advice – and you get what you pay for in most cases. If they found an Advisor who will give them the attention they need, properly structure their Portfolio based on time frame risk and objectives, and finally give them good solid ongoing financial planning and advice – then there will be value in the fees that they pay. Many things need to be considered. Not just “Low Fees”.

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  2. The goal of lower fees always makes me pause. If that goal guaranteed higher returns that would be one thing but it doesn’t. Investor behavior has a far greater impact on returns than fees and it is something you can’t predict. As for tax efficiency, this portfolio might be less tax efficient because of the bond exposure and with that weighting in bonds, chances are performance numbers will be even lower. Now if the goal was to reduce volatility, that would be another matter but reducing volatility was not one of the stated goals. The benchmarks still won’t be reached because even low fee ETFs have fee that will keep performance below that of the index. The portfolio has no exposure to REITs – a major asset class and no corporate class investments to mitigate taxes. It looks like a way to take a shot at actively managed portfolio using all tools available by throwing out a red herring that the solution lies in lower fees.

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  3. I’m betting both comments above are from financial advisors. Statistics show that very few advisors (numbers differ depending on the studies, but only somewhere around 15-25%) even meet benchmarks, let alone beat them.

    Also, most advisors just buy mutual funds (with their ridiculous 1.8 – 3.5 MER) and not individual stocks or bonds anyway. You can buy very low cost ETF’s that have an almost identical basket of stocks as any assortment of mutual funds and have .05 – .5 MER.

    To make buying mutual funds even worse, Canadians pay some of the highest mutual fund MERs in the world.

    Anyone that wants to spend even a modicom amount of interest in their money and investments would be wise to read Moneysense and/or The Canadian Couch Potato website. Even a couple hours of reading will open peoples eyes to how badly we Canadians have been duped by buying mutual funds these past decades.

    Thankfully, the government realizes this and is mandating new rules on disclosure next year.

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    • I agree with Pam. I am in the process of “changing” most of my mutual funds across to ETFs and already I see more consistent and improved returns over my disappointing Mutual Fund Portfolio. I received very little “advice” from my Financial Advisor that resulted in any descent returns on the majority of my mutual funds. I spent years trying to match or beat the index with mutual funds but without success. Sorry Bob and Allan cannot agree with.

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    • High fees unfortunately do not guarantee high returns.

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  4. Goals: 1. more income,2. tax efficiency, 3.less fees. How? 1. use high quality Cdn dividend paying stocks; 2. use a self directed NON-registered investment account via a bank or other financial institution – to take advantage of the dividend tax credit 3. do it yourself – see 1. & 2. Having 45% of the assets in bonds or bond funds make no sense at all; especially when looking at the stated goals!

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