My best friend and I are both passionate about investing. We spend several hours a week reading, talking and debating finance topics. But among all financial topics, investing is definitely the most interesting! We recently had a debate about investment strategies with mutual funds (or discretionary investments) Vs ETF investing.
We both wanted to know what is the real difference in an investor’s pockets between managing his own funds and paying someone to do it for him. We all know that paying high MERs is a big slap to your portfolio growth. But we wanted to put a dollar sign in front of this service offered by investment advisors and brokers.
I think that doing business with an investment advisor or broker can be a very good idea for most investors. My main argument is that most people can’t really effectively manage a portfolio on their own. They face one of the following obstacles:
– They don’t have sufficient investing knowledge (this is not going to happen after reading my free dividend investing eBook 
)
– They don’t have enough time to establish an investing strategy
– They don’t have the interest to establish an investing strategy
– They can’t control their emotions and will be tempted to make irrational trades based on greed or fear
This is very interesting, but it doesn’t tell you how much it costs to have your money managed by a professional.
How Much Does It Cost To have Your Money Managed?
My friend and I wanted to know what the real difference is between mutual funds and ETFs. We then ran some calculations through an Excel spreadsheet using the following premises:
– Starting point of $40,000
– Monthly investment of $1,150 indexed at 2% rate of inflation
– Decreasing MERs according to the amount invested (we took a growth portfolio and checked the % charged depending on the amount)
– 0.25% MER fees on ETFs plus $120 in transaction fees per year for rebalancing
– Investment return of 6.50% over the next 30 years
Here’s what we get if you invest in mutual funds:
Here’s the result if you do the same thing with an ETF portfolio:
The Difference is $307,109 After 30 Years!!!
As you can see, with all other things being equal, the MERs make a significant difference after 30 years. We also have to mention that if the fund managers can’t beat the indexes, the result will be catastrophic. Fortunately, when you reach a portfolio of $250,000 to $500,000 (the amount depends on the firm), you can access private wealth management with institutional portfolio managers. They are usually able to beat the index over a long period of time. But this is not a certainty. You basically hope that you will pick the right fund managers!
My Thoughts on Funds
When you look at the dollar amount, the choice seems pretty obvious. But when you look at statistics showing that most investors sell during bear markets and buy at the end of bull markets, having someone manage your money doesn’t sound like a bad idea at all. I think it is where the real debate is. Can you manage your money or not?
That is an astonishing difference–about $10k per year! To me this reinforces the use of index funds and self-management, but I hear you on the emotional risk of selling/buying at just the wrong times. I’ve done it. Perhaps a solution is a split–part self-management, part pro management?
Question:
In ETF scenario, did you take into account the transaction fee every month you buy shares of an ETF? Major Canadian banks’ self-direct investment account generally charge $29 per transaction if your total asset is less than $50,000, $9.99 per transaction if total asset is greater than $50,000. I assume the $120 fee you had stated is for re-balancing at end of each year.
It will be interesting to do a comparison with a “couch potato” portfolio using “low” MERs (~0.45%) index mutual funds (like TD e-series). I know that this isn’t a managed portfolio, but they have some benefits: small monthly contributions / dollar cost averaging, automatic free distributions reinvestment and no brokerage fees when rebalancing (can be done quartely). I think low-MERs mutual funds win for a smal portfolio, but the fees eat up to much on bigger portfolio.