Increase your retirement income without taking more risk

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If you were to receive an email with this heading, it would be prudent to think it’s a scam or a phishing attempt. After all, Santa Claus doesn’t exist. But in the investment industry, there may be opportunities for you to save like Scrooge McDuck1

According to Morningstar’s Global Investor Experience Study: Fees and Expenses2,  in Canada, asset-weighted median expenses are:

  • 1.94% for allocation funds (stocks and bonds) vs. 0.60% in the United States
  • 1.98% for equity funds vs. 0.59% in the United States
  • 0.99% for fixed-income funds vs. 0.42% in the United States 

This means a Canadian with a $500,000 allocation fund portfolio pays $6,700 more per year in fees than an American, i.e. $9,700 vs. $3,000. Do these higher fees mean better returns for Canadians?

Unfortunately, the answer is no. As at June 30, 2020, according to S&P Dow Jones Indices3

  • In the United States, 22% of U.S. equity funds outperformed the S&P 500 over five years.
  • In Canada, 2.9% of Canadian equity funds outperformed the S&P/TSX Composite Index over five years.

So, why pay fees for active management (manager whose goal is to outperform a specific benchmark) when the fees for passive management (index fund buying) are so hard to beat? Additional fees for active management also have a significant impact on your retirement savings.

For example, if you contribute $10,000 a year for 30 years to an RRSP with a 5% return before fees, you will accumulate 4:  

  • $482,838 with fees of 2% (i.e. return after fees of 3%)
  • $571,956 with fees of 1%, or 18.5% more
  • $651,502 with fees of 0.25%, or 34.9% more than with fees of 2%.

As William F. Sharpe5,  winner of the Nobel Prize in Economics, wrote in Retirement Income Analysis with scenario matrices6:  

" Before costs, the return on the average actively managed dollar must equal the return on the average indexed (passively managed) dollar.
This leads to one of the most important conclusions in investments:
After costs, the return on the average actively managed dollar must be less than the return on the average indexed (passively managed) dollar."

In other words, management fees only drive average net returns down. To save on these fees and increase your expected returns, consider the following two turnkey professional management services:

  • Robo-advisors, the thrifty option
    According to Hardbacon7,  a financial technology company that compares robo-advisors: 

    "Robo-advisors offer portfolio management services online which do not require interaction between the client and the portfolio manager. The main advantages of robo-advisors are that they do not require any investment knowledge and they offer lower management fees if you compare [them] to a traditional financial advisor. Contrary to popular [belief], the investment decisions of a robo-advisor are not done by algorithms, but by portfolio managers in the flesh.
    Most Canadian robo-advisors invest in index exchange-traded funds (ETFs). Concretely, this means that the portfolio managers working for the Canadian robo-advisors are not trying to beat the stock market, but to obtain a similar return while minimizing fees. Their portfolios therefore tend to be made up mainly of ETFs, which make it possible to invest in numerous financial products at little cost. However, there are some portfolios by robo-advisors that are made up of stocks or even mutual funds."

Depending on the invested amount and the selected company, robo-advisor fees, combined with the underlying ETF fees, range from 0.20% to 0.75%. Many major financial institutions offer this kind of service.

  • Asset allocation funds, the penny-pinching option
    The following table gives examples from the three main Canadian providers of asset allocation ETFs. They build your portfolio according to your investor profile, investing based on bond, Canadian equity and U.S. equity indexes. Furthermore, they rebalance your portfolio for you.

Turnkey ETFs


The downside of the penny-pinching option is you need to open a brokerage account, complete an investor profile questionnaire, and buy one or two of the funds in the table. However, this half-day investment could save you thousands of dollars a year, allowing you to improve your standard of living when you stop working or to retire early.

With these thrifty and penny-pinching alternatives, you won’t need to be a scrooge when you retire. Instead, you can become Santa Claus, and spoil your kids and grandkids.


Denis Preston
CPA, CGA, FRM, GPC, Pl. Fin.

1  Walt Disney character. Donald Duck’s uncle, known for being a miser. At the time of writing, comparative figures as at December 31 were not available
4According to the Capital Accumulation Calculator 
Sharpe is one of several Nobel Prize winners in Economics who have recommended the use of index funds. Others include Kahneman, Thaler, Fama,  Miller, Scholes, Samuelson and Merton.
11  Environmental, Social, and Governance