K4 vs. Investors Group - Why Fees Matter?

This Blog Alone Could Create $1,000,000,000 in Canadian Wealth in the Next 20 Years

That's not going to happen, but it should and this is just the tip of the iceberg.

Let's Get Right Into it

I want to show an easy to understand example of why fees actually matter and how much higher fees can add up over time. I think a lot of people hear the noise, but just brush it off, because it doesn't seem like that huge of a deal to pay a little more every year.

I am going to make this easy and pretend that we have a 35 year-old professional who has saved $100,000 inside of their RRSP and they want to retire in 30 years at the age of 65. To make it even easier, we'll pretend that they're never going to save or invest another dollar. If they were going to invest more, which a normal person would, the spread would be even greater.

Today I am going to look at an actual Investors Group Mutual Fund, which is very popular. It's called the Allegro Balanced Growth Portfolio and it has a TOTAL FEE of 2.76%. (See Below)

These are the total annual fees for the No-Load series of this fund. Wealthy clients invested in this fund have a reduced fee of 2.49%

These are the total annual fees for the No-Load series of this fund. Wealthy clients invested in this fund have a reduced fee of 2.49%

To be fair, there is nothing wrong with this portfolio, with the exception of the high fees. It has a good asset mix, is properly diversified and rebalances on a daily basis, but as you can see it appears to be fairly expensive.

This fund is also quite popular, because of what I mentioned above. I actually think it's a better idea to invest in one of these portfolio funds if you have money at a bank or financial institution, rather than have your advisor guess and pick funds based on their gut feeling, or what other investments have done in the past.

This Fund is so popular that there is over $1.3 Billion invested inside of it (Meaning they're charging well over $30,000,000 in fees every year on just this one fund). Keep in mind that this is one of Thousands of Mutual Funds in Canada that is overcharging Canadians, who have well over a Trillion Dollars invested in high-priced funds.

Today I just felt like picking on this one, but to be fair, I could pick on funds from any institution.

The Math (Sort of)

To help you understand, I am going to dumb down the math and pretend that the fees are taken off at the end of each year. This will slightly throw of the results, but I hope it drives the point home.

If you read my Blog talking about Rates of Return (which I'm sure you didn't), you would know that I should assume a rate of return of approximately 6.5% (before fees) for a portfolio with a make-up of 80% Equity and 20% Fixed Income.

Also, you know that when my clients invest with WealthSimple and get financial planning advice from me, they pay a Total Fee of 1.15%. I give advice that is similar, however in my opinion, much better than any Consultant at Investors Group, (because I don't do a plan unless I have all of the information, I show options that aren't just limited to their shelf, I always reduce the fees and I am completely transparent about all of the fees my clients pay), but if you don't want my advice, then you could drop your fees even lower by just investing with WealthSimple, or another Robo-Advisor.

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Now, let's look at what's happening. Each investment starts at $100,000 and grows at 6.5%/year. Then the fee is taken off at the end of each year.

At K4, the investment grows by $6,500 in year 1 and then your return is reduced by $1,225 ($106,500*1.15%).
The next year your investment starts with $105,275 and grows by 6.5% to $112,118.

At Investors Group, the investment grows by $6,500 in year 1 and then your return is reduced by $2,939 ($106,500*2.76%).
The next year your investment starts with $103,561 and grows by 6.5% to $110,292.

This continues to happen and the extra growth starts to compound on itself, so the difference in fees starts to make a bigger difference as each year goes by. So let's look at the Total Fees, Difference in Fees, Total Growth and Difference in Growth over 5, 10, 20 and 30 years.

As you see here, over the course of 30 years, you would have paid almost $68,000 more in fees. How much of a difference do you think this will make in growth?

As you see here, over the course of 30 years, you would have paid almost $68,000 more in fees. How much of a difference do you think this will make in growth?

$182,000 WOW!!!

$182,000

WOW!!!

Is it starting to make sense now?

This is happening at every bank. Every financial institution. And is costing millions of Canadians tens to hundreds of thousands of dollars that could be used in the future.

Now, remember when I said that this blog could create $1,000,000,000 in Canadian Wealth in 20 years? Well, let's pretend that every person who was invested in that fund right now. All $1.3 Billion Dollars, decided to invest with me instead.

In 20 years, based on my estimated market rate of return of 6.5%, Canadians would save over $500,000,000 in fees and there would be almost $1 Billion in extra growth.

I obviously can't handle that kind of volume, but this is exactly why companies like WealthSimple and other Robo-Advisors in the country are so important.

It's time to take some of your own money back.

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