Bootcamp: Understanding Industry & Advisor Fees


Welcome to one of my favorite subjects to teach: Understanding Advisor Fees.

If you only re-read one of these course lessons, please make sure it is this one.  Almost no other factor (besides diversification!) can have such a dramatic effect on your portfolio returns. And in turn, your future lifestyle. Fees are that important. 

What if I told you I could help you add over $350,000 to your future?

Let’s do this: 

You are 34 years old, and you are ready to learn how to invest. You notice an ad in the local newspaper for an introduction to investing seminar put on by a well-known mutual funds company, ABC Mutual Fund Company. Intrigued, you attend. 

At the event, the free coffee is abundant, and there are many laminated handouts with charts (going up!) and blurbs about assets under management, and out-performance. 

Impressed, you agree to open an account with ABC and the next day you transfer the $43,000 from your savings account—an amount you have managed to save since you started working full time at 26. 

You take the advice of the Financial Advisor from ABC and begin contributing $350 from each pay period. This (wise!) decision amounts to an additional $8,400/year in your portfolio. 

Leaving the event, you have a thought and ask the Advisor, “What are the fees for my new investment portfolio?” He assures you there are no up-front costs to purchase your mutual fund and that no fees will ever be taken from your account. You find this odd but before you can ask anything further, the Advisor moves on to speak with another client. 

25 years pass. 

At the young age of 59, you decide it is time to slow down a bit and check your account at ABC Mutual Fund Company to see the funds available for supplementing your income. 

Your scenario: 

  • Initial Contribution:  $43,000 
  • Monthly contribution for: $700 
  • Average rate of return over 25 year period: 8.4%
  • Balance in your account after 25 years: $629,316

Fantastic, right?!

Almost $600,000 that you can draw from while the remaining funds continue to grow. Are you happy? You should not be. You should be proud that you started investing at a young age and that you made regular and automatic payments to yourself (via an investment account), but you should not be happy.


Because you are a smart woman and all this time, you knew it was odd that you did not seem to be paying any fees for an account at the ABC Mutual Fund Company. But you were so busy being awesome at what you do best, professionally and personally, that you did not take the time to investigate why something that seemed too good to be true was. 

It does not matter what the exact fund was that you held for 25 years.  With few exceptions, over 25  years, the funds are the same and the average Canadian pays 2.5% MER (Management Expense Ratio) on their mutual fund holdings. 

What is an MER? It is the [hidden] fee that the mutual fund industry charges for the privilege of their funds rarely, if ever, managing to outperform a computerized benchmark or index. It is the fee that is used to pay Jane Smith and her research team to pick stocks. It is the fee that is used to pay the operating costsrent, trading costs, heat, information technology—of the ABC Mutual Fund Company. It is the fee that is used to pay the Financial Advisor at ABC Mutual Fund Company a lucrative upfront commission and a smaller payment each and every year that after. It is a fee paid by YOU.

Why do I claim the MER is hidden? Because it is published almost nowhere you would ever see it, including your account statement. Yes, it is published by law in the fund’s mutual funds simplified prospectus, a document that is often over 40 pages long and comprised of very fine print. And if you know what you are searching for, the fee can be found online. The mutual fund industry has a vested industry in you never learning that the MER exists, or ever being able to find it easily. And you didn’t, did you? 

You do not see the fee in your monthly statements because the amount of the fee is deducted from your portfolio returns before the performance is even reported to you. If that is not the definition of hidden, I am not sure what is. 


You have $100,000 invested in a fund with a 2.5% MER. The fund has a return of 5.6% (from it’s diversified portfolio of stocks) for 2015. The MER is calculated on the total amount you have invested with the ABC Mutual Fund Company. (yes, you read that right, the entire amount of your account, not just the gains), and this would be the calculation:

» $100,000 x 1.0056 =  $105,600 in your account for 2015
» $105,600 x .025 = $2,640 fee paid to ABC Mutual Fund Company for 2015 
» Annual return reported in the financial media for 2015: 3.1%

Is the amount of $2,640 paid by you ABC communicated to you in any capacity?  No. 

On that note, I have one last number for your 25-year scenario: 

  • Initial Contribution: $43,000
  • Monthly contribution: $700
  • Average rate of return over 25 year period: 8.4%
  • Balance in your account after 25 years: $629,316
  • Opportunity Cost of fees paid to ABC Mutual Fund Company: $369,546

Still think that coffee was free 25 years ago? 

You ask, “OK Nanci, you have made me realize that there is always going to be a cost to investingeither in MER or commissionwhat is the alternative? Where is this $350,000 you are going to help me add to my future?”

Does anyone already know the answerfrom Lesson #2? Yes, your are right: ETFs. 

With ETFs, asset selection is determined by computer algorithm (not by Jane Smith and her team). And there is no fleet of Financial Advisors (requiring $$$) selling the ETFs to the public. For these reasons alone, ETF companies can provide access to rock solid diversification at a fraction of the MER of the mutual fund industry.  

Here is your 25-year scenario with an ETF: 

  • Initial Contribution: $43,000
  • Monthly contribution: $700
  • Average rate of return over 25 year period: 8.4%
  • Balance in your account after 25 years: $995,908.92
  • Opportunity Cost of fees paid to XYZ ETF Company: $9,465

And there is the additional $366,592 available to you in your future. 

Question: Can a passive (index/ETF) investment strategy perform as well as active (mutual fund) management? 

Answer: Yes. 

Fact: In measuring Canadian Equity funds, only 13.6% of active managers outperformed a broad-market alternative after fees, according to a 2015 Morningstar study. 

Wow! I hope that was not far too much information to throw at you in one email. It is a delicate balance for me to teach the concepts of investing, provide enough information to back up what I have to say, but not have you become overwhelmed. 

Congratulations! You are almost halfway through this e-course! Four more lessons to go. Watch for Lesson #4: Bonds? I’ll Take One Thanks, in your inbox in the next few days. 



p.s. I have had several requests to provide step-by-step, deep dive into exactly how to start and maintain an investment portfolio. I am excited to announce that I will be launching Zero to Portfolio, An Investing Masterclass in October of 2015. The course will be100% video based, you can just sit back and let me walk you through it all.  

You don’t have to do anything now – I will send you a note when it is available for pre-order. Just keep in mind, if you want more from these email lessons, there is a Master class a few weeks away.