A Tale of Two Bakers
Who Would You Choose?
The reason why I started this company is because I know that there is a lot of confusion when it comes to investing in Canada.
I like to use metaphors to explain things in terms that everyone can understand. Below I am going to break down how you're paying for your advice by using two bakers as an example. Then I will show you how that relates to your current investment advice.
Baker 1 is a nice guy and he decided to open a bakery inside a large chain of grocery stores. He wanted to make his delicious bread for his customers. However, when he decided to open inside the grocery chain he was told that he had to use the ingredients they provide.
The grocery chain buys its ingredients from a farm that owns the grocery chain at a cost of about $1/loaf of bread.
Then the farm tells the grocery chain tells to sell a loaf of bread for $2.20. This way the grocery chain will make $0.60 off of the sale of each loaf and the Baker can take his cut of $0.60/loaf.
This means that Baker 1 is charging his customers $2.20/loaf, but he's only making $0.60 and the farm that owns the grocery is making the remainder of the profit, which is $1.60/loaf.
Baker 2 doesn't like how the big grocery chains like to charge a premium for a loaf of bread when he knew that he could make the same quality loaf for a much lower cost. This would save his customers a lot of money, but it was a risk, because people tend to shop at the larger grocery chains a lot more often, so it would be harder for him to get customers, even though the bread was the same, but much less expensive.
Baker 2 found a supplier that would work with a few farms to get him his ingredients. The supplier buys the ingredients for a loaf at a cost of $0.20/loaf. They then charge the baker $0.35/loaf to ship the ingredients to the baker and make sure the ingredients are high quality and in proper amounts.
The baker has bought his ingredients at a much lower cost ($0.55/loaf) and then decides to sell the loaves to his customers at a cost of $1.15, so that he can make a profit of $0.60/loaf, which is the same profit that Baker 1 gets off of each loaf, but he has to pay for his own shop.
He has saved his customers $1.05/loaf by not dealing directly with a large grocery chain owned by the huge farm.
Which Baker Will You Choose?
How is this like Banks vs. K4 Financial?
The average Bank has a MER on their mutual funds of approximately 2.20%. Some banks and funds are lower and some are higher, but the average is approximately 2.20%
When you buy a mutual fund from the bank, the fees are broken down like so (This isn't exact, but I hope you get the point):
The Mutual fund will get about 1.0%. The fee will go directly to the Corporation (The Farm).
The remaining 1.20% goes to the branch level (The grocery store). The branch will then pay the Advisor (Baker 1) 0.60% for the sale of each fund (loaf of bread). Let's hope it's not just a sale, but that the advisor is providing some advice.
WealthSimple (supplier) will buy the funds from a whole bunch of different ETF companies (Farms). The ETF companies charge an average fee of 0.20%. WealthSimple provides K4 with the asset management side of things for a fee of 0.35%.
K4 then charges 0.60% for the financial planning advice. This makes the total fee come out to 1.15%
If you are not interested in advice, you can buy the funds directly from WealthSimple at a cost of about 0.70%, or less if you have over $100,000 to invest.
I am paid to bake the loaf for you, but if you want to buy the ingredients from them in the correct proportions and bake your own bread you can and you'll save money. Basically, if you don't want advice, they will manage your portfolio for less and that's not a bad option if you're not interested in getting a financial plan or analysis done.
If you want to buy directly from the ETF Companies (Farms), at a super-low cost, then you can do that as well, but you'll have to order the proper proportions if you want to get value for saving that money. There are a lot of blogs online that will explain how to do this and it's not very hard to do if you're the type of person who likes to manage their own stuff.
I am a baker with a small bakery that wants to make great bread for my customers by buying quality ingredients from a trustworthy source and putting my heart and soul into each loaf that I am trusted to bake for my clients.
I hope that makes sense.