IT’S THE LITTLE THINGS
It’s easy for us to forget about small fees on investments, but they add up over time.
We’re mesmerized by big numbers, trained to pay attention to them and give them more weight than small ones.
That sale offering 50 per cent off a $700 flat-screen TV makes you sit up and pay attention. But 2 per cent inflation? Or a recurring 2 per cent investment fee? They’re too small to worry about.
My first experience with the power of really big numbers goes back to an oil boom. By the late 1980s, Dome Petroleum was one of our biggest oil companies, always looking for ways to pump up its stock and raise funds for exploration.
Smilin’ Jack Gallagher, its charming CEO, would give presentations where he’d outline the potential reserves in the Canadian Arctic. Looking earnestly over his half-moon reading glasses, which were perched professorially halfway down his nose, he’d say that the Mackenzie Delta might hold two, maybe even three times the oil reserves of Saudi Arabia. They were lined up outside the door to buy Dome’s shares.
Dome eventually foundered under the weight of high interest rates and too much debt. The promise of the Mackenzie Delta remains untapped.
These days, the big numbers are different. There’s the trillions of dollars and euros printed in the U.S. and Europe to push rates down; there’s trillions more in national debt.
When it comes to investments, there’s a hope that the big numbers in emerging markets will carry the world economy forward. China, with a GDP of $13.9 trillion (U.S.) in 2015, will soon surpass the U.S. as the world’s largest economy.
India, the world’s largest democracy, will likely be No. 3 in a decade or so. By 2050, India’s vast middle class will account for 40 per cent of global consumption.
Those numbers might one day hold big investment gains. In the meantime, paying attention to smaller numbers here at home can have a more immediate affect on your life.
A tiny reduction in the fees you pay for mutual funds or financial advice has a dramatic long-term effect.
Fees are actually one of the biggest obstacles to investment success, because they exact a double penalty. You not only lose money by paying them, you also miss the compounding power that the extra money would have made.
But fees are not very interesting to most people, and they seem quite small. When the monthly statement arrives, the focus is on the bigger performance number, which is reached after fees are deducted.
Canadians also think that what a person makes is none of their business, even if that person is managing their money. A recent study by the B.C. Securities Commission found many investors think it’s rude to ask how their adviser is paid. One in four people is not actually sure what they’re paying, assuming it’s fair.
The graphic below shows why that type of thinking is costly. It looks at management expense ratios (MERs) over time, and shows how much you miss out when the difference in the fee is just 1.4 per cent.
The MER is all the fees rolled into one. It includes fees charged by the fund to manage its operations such as day-today costs, office expenses, legal fees and preparing annual reports. The MER also includes the harmonized sales tax.
New rules that come into effect this summer will make it easier for you to figure out that total. As of July, CRM2 (Client Relationship Model, phase 2), will ensure that clear, easy-to-read details of these fees are in one place on your statement. Some of these costs are now hidden or hard to discern.
Good advice is worth paying for, but it pays to keep on top of what it costs. Take a close look at your statement. Big numbers come and go. Little ones keep adding up. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca.