Low cost investing

Low cost investing is thinking about the costs and fees that you pay on your investments, so you can keep more of your money earning a return. There is no question that the costs we incur in investing deduct directly from our returns -- it's simple subtraction.^[1] In other words, costs matter, a penny saved is a penny earned.^[2]

In a poll of over 1500 Canadians ... 87% of respondents didn’t know or underestimated the long-term impact that a 2% fee would have on their portfolio compared to a 1% fee.^[3]

There are many types of costs potentially associated with investing:^[4]^[5]

fees charged by an financial advisor, if you use one;
fees charged by a financial intermediary such as a discount broker, including trading commissions, annual account fees, currency conversion fees, etc.;
management fees and other fees charged on products such as mutual funds or exchange-traded funds (ETFs);
additional fees associated with some mutual funds, such as trailing commissions (included in the MER), front-end loads, back-end loads, and short-term trading fees.

Canadians have a wide variety of institutions and products to choose from when setting up their investment arrangements. For DIY investors:

A wise brokerage choice has the potential to save hundreds of dollars a year;
Going from high-fee products (such as many actively managed mutual funds) to very low-fee products (such as some index ETFs) could save you thousands of dollars a year.

Brokerage fees

Do you need a brokerage account?

Some simple portfolios do not require brokerage accounts, and can be held at banks or mutual fund companies. Many DIY investors on the Financial Wisdom Forum use a brokerage account to access a wide range of investing products.

Discount brokers

Discount brokers allow investors to buy and sell securities on-line while typically offering comparatively fewer services and/or support, relative to a full-service broker. The types of products that can be purchased in a brokerage account include:

individual stocks trading on the Canadian and US exchanges (common shares and preferred shares)
individual bonds and guaranteed investment certificates (GICs) from the brokerage's inventory
mutual funds, including index funds, ultimately from the fund companies
exchange-traded funds on the Canadian and US stock exchanges
options

In exchange for this service the brokerages charge commissions and various fees. It is worth shopping around! See the Discount brokerage article for the latest broker comparisons.

Full service brokers

Full service brokers offer a wider range of services, compared to discount brokers, so will generally be more expensive. These services can include financial planning, portfolio management, research on securities, estate planning, tax planning, etc.^{[citation needed]} Typically a specific 'advisor' (or "wealth advisor", or similar title) is assigned to each client. Compensation models for full-service brokers include commission-based or fee-based (% AUM). Well known brokers include RBC Dominion Securities, BMO Nesbitt Burns, Scotia McLeod, National Bank Financial, Desjardins Securities, etc.

Full service brokers are typically not a good option for DIY investors, who can do fine using a discount broker. There is perhaps one exception: full service brokers may have a larger bond inventory and possibly better bond pricing, relative to discount broker.^{[citation needed]} Investors who trade stocks infrequently or who intend to use an account entirely for fixed income may wish to investigate use of a full-service broker for purchasing individual bonds.

Product fees

Selection of specific investments products is one of the last steps of portfolio design and construction. But when you do get to the step of chosing specific products for each asset class, be aware of all costs. The main one tends to be the management expense ratio.

Play with the Ontario Securities Commission's Fee calculator to see the impact of fees over long periods. For example, suppose you invest $10k a year for 30 years, and the return is 5% a year:

Without fees, theoretically, you would end up with $697,608;
With a 0.25% fee (typical of asset allocation ETFs), you would have $666,796;
With a 1% fee, you would end up with $583,283, after having paid $114,325 in fees (a forgone growth of -16%);
With a 2% fee (typical of many mutual funds), you would have $490,027 in your account, after fees of $207,581 which represent forgone growth of nearly -30%;
With a 3% fee (typical of many segregated funds^[6]), you end up with $413,794, having paid $283,813, or 41% of the final value, in fees.

References

^ Johnson, Ben (Feb 10, 2016). "The Cost Matters Hypothesis". Morningstar. Retrieved February 16, 2023.
^ A penny saved is a penny earned, viewed February 15, 2012.
^ Wealth Professional Canada, Canadians underrate impact of investment fees, finds study, February 25, 2020, viewed November 7, 2023.
^ Canadian Securities Administrators, Types of Fees, viewed November 7, 2023.
^ Canadian Investment Regulatory Organization (CIRO), Fees and Costs, viewed November 7, 2023.
^ Morningstar (a financial services firm), Segregated funds are not the right way to resist market volatility, December 5, 2022, viewed November 11, 2023.

External links

Do-it-yourself investors: Watch those online broker fees, Rob Carrick, The Globe and Mail, viewed 27 November 2016.

[1] Johnson, Ben (Feb 10, 2016). "The Cost Matters Hypothesis". Morningstar. Retrieved February 16, 2023.

[2] A penny saved is a penny earned, viewed February 15, 2012.

[3] Wealth Professional Canada, Canadians underrate impact of investment fees, finds study, February 25, 2020, viewed November 7, 2023.

[4] Canadian Securities Administrators, Types of Fees, viewed November 7, 2023.

[5] Canadian Investment Regulatory Organization (CIRO), Fees and Costs, viewed November 7, 2023.

[Morningstar-6] Morningstar (a financial services firm), Segregated funds are not the right way to resist market volatility, December 5, 2022, viewed November 11, 2023.

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