As mentioned in a previous post, I am the financial black sheep of my family of origin and have been more proactive with my money than my sisters who are also millennials. They are a bit more risk averse than me in terms of investing and don’t prefer the DIY Investing approach like I do.
I have tried in the past to get them excited about personal finance and investing. A few years ago, I set up a TD e-series Tax Free Savings Account for them and reviewed how to set up monthly contributions so that they can take advantage of dollar cost averaging. I reviewed how to rebalance regularly to ensure that their original asset allocation was maintained.
However, the other day, my sister told me something that made me feel like I was cheated on.
Let me explain.
the nice mutual fund lady
In the last year or so, I have heard about this lady that has taken one of my sisters out for coffee a few times. She is a financial advisor and does teaching sessions about personal finance (that’s how they met). She is nice and is apparently very approachable.
I would hear about this nice lady from time to time. Then recently, one of my sisters said she was going to invest $40,000 of her money into a Fidelity mutual fund endorsed (let’s be honest, sold) by this nice mutual fund lady. Of course, when one sister invests the other will follow suit (they are very close to each other and hang out all the time).
Alarm bells sounded off in my head. A bad word was uttered.
She dropped the M-bomb.
Of course not all mutual funds are terrible, but they can be terribly expensive and can erode into your investment returns. They can erode your hard earned money and make your money work less hard for you.
I asked her if she knew how much the MER was and how much it cost to invest in that fund.
She said investing in the fund was of no cost to her.
Of course I reviewed with her that that there’s such things as Management Expense Ratios and that mutual funds are notorious to have higher fees (probably over 2% for Fidelity mutual funds). I reviewed that mutual funds are not free and the cost to her is actually somewhat less obvious.
Mr. GYM is also not a big fan of mutual funds, but does have a few, like one of the Chou Funds (Francis Chou the fund manager reimburses you for your mutual fund fee if it does not perform well). Mr. GYM likes to refer to MERs as “the financial advisors (and associated people including fund manager) enjoying a cup of coffee a day on your behalf”. In this case, probably a nice latte a day.
I was shocked, disappointed, and saddened but I tried to keep it together. Her mentioning the M-bomb brought back my own memories of investing with Investor’s Group where the financial advisor didn’t tell me that I was paying a 2.5%+ MER on my investment. They even wanted me to leverage my money to invest with more them. Snapping out of my tainted Investors Group memory, I asked her how her TD e-series were doing (you know, the ones that cost less than 0.5% because it is passive and tracks the index). She said it was doing okay.
I asked her if she rebalanced it according to the original asset allocation yet. She said no and she forgot how to do it. I offer to help her rebalance her investments but she seemed disinterested. I even offer open up the Young Money Bootcamp eCourse for her so she can learn how to DIY invest and rebalance. Nope, not interested. She was probably getting annoyed at her big sister being her usual bossy self.
Then I got to the point, and asked her why she wasn’t interested in a Do It Yourself Approach with investing. I ask, because as we all know that no one cares about your money more than you.
how fees erode your investment
There’s a great mutual fund fee calculator from Get Smarter about Money, an Ontario government backed initiative. You can find the mutual fund and see the MER associated with it, and compare it to other funds.
I compared the one she mentioned Fidelity Canada Growth Fund (Last year’s return was a respectable 8.16% but the MER was 2.60%) with the TD e-series US Index (last year’s return was 9.12% and the MER was 0.37%).
With the $40,000 investment over a horizon of 5 years, the Fidelity fund would cost her $7325.39 in fees whereas a TD e-series US Index cost $881.56 in fees and the end result would be $62,118 for TD e-series and $59,097 for Fidelity.
Of course just buying the US Index is not diversifying but I just used this as an example to show that fees can erode your investment.
some people don’t want to diy invest
My sister was honest with me and said she isn’t interested in learning how to DIY Invest.
In her words “I just want to give my money to someone and not think about it”.
Well, I told her that if she wants to do that, then investing with a roboadvisor is an option, for around 0.75-1.00% fees they can automatically rebalance your portfolio if the original asset allocation is off by more than an absolute 5%.
Anyway, she didn’t seem completely convinced even when I talked about robo-advisors but did sound like she would fork over a smaller amount of the $40,000 to the nice mutual fund lady. She probably feels indebted to her for buying coffees and teaching personal finance for ‘free’.
In the end, not only did I learn a lot of lessons from DIY investing since my early 20’s, I learned a few lessons trying to persuade my sister to do the DIY investing approach.
Here are a few lessons I learned from this
- The mutual fund lady is good at sales and has their trust
- Not everyone is interested in DIY investing or has the time to DIY
- Credentials really makes people trust you rather than learning through experience and mistakes from others (like their big sister)
- Perhaps some people would rather fork over money to a financial advisor so they can blame the financial advisor when their money doesn’t perform, rather than blame themselves
- Even though there’s been a shift to purchasing Exchange Traded Funds and Index funds- and Exchange Traded Funds have ballooned exponentially, mutual funds are still alive and kicking
- People need to learn from their own experiences rather than being told what to do (let’s face it, I learned about investing the hard way by investing with mutual funds and then seeing it being eaten away by fees and not performing to what I had expected, in my investing journey, I also was cautioned against buying penny stocks and I still did)
- Don’t be afraid of DIY Investing, the index really is your friend! Perhaps they will learn about this 5+ years down the road, like I did when I first started investing.
Readers, do you DIY invest or do you prefer to use a financial advisor?