In recent years, investment fees have lowered for the average Canadian investor as new online brokerage accounts such as Wealth Simple and Questrade continue to make ground in the market. These companies often make their money by short selling the investors they bring in. While lower fees are often celebrated by Canadians, these lower fees come with additional baggage many Canadians do not understand.
For years, consumer pressure has given rise to lower fee-based investing. Fees have come in several forms: from single transaction trades to overall portfolios, and fund management. Canadian’s pay some of the highest fees when compared to other developed nations such as the United States and the UK. While fees have risen in the past to several percentage points of any capital gains in many instances, the industry, especially in Canada, has now lowered costs significantly. While for the average investor these headlines may seem positive, lower fees without doubt at its core come at a cost to the average investor that does not take the time to fully understand the situation at hand.
During this time, average Canadian household investors have shifted from a majority of portfolios containing mutual funds to Exchange Traded Funds (ETFs). The conventional ETFs have lower fees compared to the monsoon of fees that are often omnipresent in the mutual fund industry. However, likewise to mutual funds, ETFs often contribute diversification to portfolios that single stocks or bonds cannot provide. Though this shift has allowed Canadians to get similar returns on their portfolios and have lower fees – this has caused headaches in the mutual fund industry.
While low fee investing may seem enticing, especially with the ads that appear on TV contrasting the innovative and youthful millennials to the archaic investor-type baby boomer asset managers. By seeking out these low fee investment products everyday investors, millennials and baby boomers alike, can often limit themselves without even knowing it.
Overall, this shift in consumer preference has put downward pressure on investment fees across the board to the benefit of investors. The industry has recently even gone as far to sell negative fee ETFs. Yes, that’s right – a fund that pays you to invest in their fund.
Seeking low fees often lead to investing in products through online brokerage accounts such as Wealth Simple and Questrade. Going this route forces the everyday person to become a DIY investor. The freedom that this could bring may attract some average investors with modest returns. However, those that are capable of going this route and achieving similar or more successful returns than the traditional investing path through a bank or with a wealth manager are likely far and few between.
Enterprises that offer low fees have a clever functioning business model. While their rates often beat most of the traditional market, they do so at the brunt of the investors that invest with them.
As investors are forced to take a DIY approach, the investment exposure rests with the investor and not with the online brokerage. This results in an opportunity for low fee brokerages to short sell their own investors positions, which often result in large returns as finance commentator Preet Banerjee has highlighted. This is the exact model that affords online brokerages to offer far lower fees than the going market rate and breeds the opportunity to offer zero and negative rates. This will, in turn, attract more people to invest with them, likely appealing to those less educated on the situation unfolding.
Now, the question emerges for everyday household investors: would you rather low or negative investment fees in a DIY manner in which risk is high and potential return is diminished or fees in the form of small percentages in which professionals manage your portfolio, with lower risk and increased earning potential?
The answer to the question that Canadians battle with daily now become clearer. It pays dividends (quite literally) to pay fees to surround yourself with good advice and professionals where risk is minimized, and the potential gain is maximized. Where a looming recession may be near, keeping your investments with reputable institutions and wealth managers is the fiscally and personally responsible decision.
Bloomberg. (n.d.). ETF ups fee-war stakes by offering to pay investors.
O’Hara, C. (2019, June 24). The rise of ETFs is making life miserable for Canada’s mutual fund industry.
CBC News. (2018, August 17), The latest investment trend? Take low-fee a step further and make it free.
Omololu, E (2019, August 10). The Many Faces of Investment Fees in Canada.
Weiss, M. (2019, June 25). Stop Paying High Mutual Fund Fees.