Most Canadians have no idea what their investments actually cost them. The fee is buried in a document nobody reads, taken out a little bit at a time, and the statement still shows a number that went up this year, so it feels free. It is one of the most expensive things you will ever not notice.
I want to show you the math that pulled me into financial planning in the first place, because once you see it, you can't unsee it.
Where this started for me
For years I watched my parents get the kind of "free" advice a bank gives you. Someone friendly sits you down, puts you in a few mutual funds, and never sends you a bill. What I didn't understand at the time was that the bill was always there, it just came out of the returns before anyone saw it. They were paying well over 2% a year, every year, for products with no real evidence of beating a simple index.
The thing that really changed how I saw it was an episode of Freakonomics Radio called "The Stupidest Thing You Can Do With Your Money." Anyone who knows me knows I'm a numbers guy, I love thinking about numbers, and when I worked out what a 2% fee does over an investing lifetime, I couldn't get it out of my head. Then I started thinking about how many Canadians are paying fees like that, since Canada has some of the highest mutual fund fees in the world, and how a 2% fee can balloon into a huge portion of someone's wealth over the years, the way the example below shows. It bothered me, and it made me want to do something about it.
What 2% does to your money
A 2% fee sounds small, but over a lifetime it takes a big slice of your final outcome, because it compounds against you for as long as you stay invested.
Say you invest $100,000 and leave it alone for 30 years, and your investments earn 8% a year before fees. That 8% is just an assumption to show the mechanics, not a promise, but it's a reasonable long-term number to think with.
If you pay a 0.2% fee, which is roughly what a low-cost index ETF charges, your money grows at about 7.8% a year and turns into around $952,000.
If you pay a 2% fee, which is normal for a lot of Canadian mutual funds, your money grows at about 6% a year and turns into around $574,000.
It's the same starting amount, the same investments underneath, and the same 30 years. The only difference is the fee, and it cost you about $377,000. That's not a typo. The high-fee version handed back roughly 40% of what you could have had, and you never saw it leave.
It works the same way if you're contributing as you go. Put in $500 a month for 30 years at that same 8%, and the low-fee version lands near $716,000 while the 2% version lands near $502,000, a difference of about $213,000 for nothing you can see or feel along the way.
Why a 2% fee is bigger than it sounds
A 2% fee on an 8% return isn't really a 2% fee, it's closer to a 25% fee on your returns. The fee comes off the whole 8%, but what you keep is what's left after it, so giving up 2 points out of every 8 means you're handing over about a quarter of your gains every year. Said that way, it changes a little bit, because nobody would knowingly agree to give a quarter of their returns away for a product that doesn't beat a simple index.
And it compounds. 2% of a $100,000 account is $2,000 this year, which doesn't feel alarming. But that's $2,000 that's no longer growing for you, and you pay it again next year on a balance that should have been bigger, and again the year after that. Over a few decades the gap doesn't add up, it multiplies.
You are also very likely not getting more for the higher price. The long-run evidence is consistent, and it's not really up for debate at this point. Most actively managed funds underperform a simple low-cost index over time, and the higher the fee, the harder that gets. You are usually paying a premium for a worse expected result.
What about the funds that beat the index?
The fair pushback is that some funds do beat the index, so why not just pick those? The problem is that the winners are nearly impossible to identify ahead of time, and last year's top fund is a poor predictor of next year's. You'd be paying a guaranteed high fee for a maybe, and when the cost is certain and the benefit is a coin flip, the math points the same direction every time.
None of this means anyone holding high-fee funds was foolish. Most people were never shown the alternative, and the products were sold to them by someone they had every reason to trust. That was true for my parents, and it's why I think the fix here is information, not blame.
What to do with this
You don't need to do anything dramatic today, you just need to know your number. Find the MER, the management expense ratio, on the funds you own. It's on the fund's page and on your statements once you know to look for it. If it starts with a 2, it's worth understanding what that's costing you over the years you have left to invest, and whether a simple low-cost option would do the same job for a fraction of the price.
That one number, the fee, is the part of investing you have the most control over, and the part that matters most. You can't control the market, but you can control what you pay to be in it.
This is general financial education, not individual advice. The example uses an assumed rate of return to show how fees compound, and your own situation will differ. For advice specific to you, talk to a qualified professional.
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