I Want to Make You Rich - not the Financial Institutions
One of the most common money leaks I see when I work with clients is secret investment fees. They aren’t really a secret, but you gotta go looking for them to find out how much they are annually, and most people don’t do this.
Now, I’m not saying all investment fees are a waste, so let me paint a specific scenario. A lot of Canadian employers offer some kind of employer matching pension scheme, usually in the form of an RRSP. These are a great way to accumulate investments and wealth. The employer matches your contributions to an RRSP up to a certain percentage of your base salary, and the money grows. This is probably the best return on your money you can get – 100%! Since the contributions you make come straight off your paycheque, this requires little discipline each month because you don’t even see the money in your bank account (and therefore, don’t miss it).
Employers partner with one of the large financial institutions such as Sunlife or Manulife, and the investments are primarily invested in high-cost mutual funds. This is all fine and good while you are at the employer and making active contributions. The issue comes in when you leave the employer and contributions to the plan stop. You always have the option to leave your investments with that institution or move them. Most people don’t really know what to do with them, or where to put them, or they just get busy and forget, so they leave them there.
BUT, here’s the rub. In order for these big financial institutions to operate and make money they have to charge fees on these investments - to the tune of 2.5-3% annually. I don’t have any issue with paying these types of fees if you are getting value from them, like a human that speaks to you, reviews your investments regularly, checks in on you and your personal situation to determine if adjustments are needed. But these types of accounts don’t have that service, so you are paying A LOT of money for them to basically mail you quarterly statements.
Here’s an illustration of the magnitude. Let’s say you have accumulated $50,000 in one company plan paying 3% for the funds. Your returns are being eroded by $1,500 per year in management fees! That $1,500 fee annually with the compounding effect could be an additional $70,000 in 20 years on top of your already growing investments if you weren’t paying them to the financial institution.
If you aren’t going to speak to anyone, and you don’t require that human contact with your portfolio – then you have other options that are a fraction of that cost such as, a robo-advisor or doing it yourself by opening your own brokerage account and buying low cost index funds or exchange traded funds.
So do me a favour and put that $1,500 back in your pocket and move those investments either to an advisor that will spend time with you OR a much cheaper option. Plus, doesn’t it just feel more organized when the majority of your investment accounts can be in one or two places, not six?
Because I want you to be rich, not the financial institutions.
Much love, gratitude and money.