Saturday, 10 October 2015

Actively Managed RRSPs – the biggest scam on planet earth

‘Actively Managed’ RRSPs/retirement funds – the biggest scam on planet earth

Right above the No. 2 scam, Realtor commission rates…

QUESTION: Why, would the vast majority of Canadians and the rest of worldly investors, willingly give up 40-50% of their profits, to financial money managers, over the lifetime of their RRSP/retirement investment timeline ?

Why indeed ?

If you’re like me, you sat down with your investment manager [in my case, from a Canadian firm we will call  'Investor' Company for the sake of argument] and at some point, I asked him, “so how do you make your money here ? “ He promptly replied, ” in the case of this specific fund, we charge 3.2% of your profit. 

I thought to myself,  

 $3.20 for every 100.00 dollars profit I bring in (gross),
is actually really good…
These guys are not the grubby greedy snakes I presumed !

And thus, the conversation ended, with a smile on his face.

What I found out years later, was this ‘charge’ is called a ‘Management Expense Ratio (MER)
So, ten years went by, and eventually I was wondering, why my tens of thousands, didn’t seem to be making that much money, despite my 9 -10 % returns…especially considering, that I was only being charged 3.2%, a paltry sum…

Except it wasn’t just 3.2%  …. Three dollars & twenty cents for every $100.00 in profit….
It was and is the FIRST 3.2%

Allow me to explain.
For simplicity sake, let’s say our funds MER is 2.5%. I invest a bunch of money and end up making a gross profit of 5% (5% which works out to $1,000.00)

ABC Investment Corp will take their 2.5% MER right off the top, leaving me with the remaining 2.5%....of my initial 5% …..

Confused ? You should be…

It’s not $2.50 for every $100.00 profit, it’s the FIRST  2.5% of my 5% I made !

THIS, is the industry’s dirty little secret.

And just what percentage, is 2.5% of 5% ?  …….You guessed it, 50%


Why would anyone give up 25/30/50% of their profits to an investing company/guru ?
Remember that $1,000.00 gross profit I made ?   Well, it’s actually going to be $500.00, as ABC Investment Corp will skim their 2.5% MER/$500.00 (the first 2.5% of 5%) right off the top, before I even see it (standard practice in the entire industry, wouldn’t you guess), and I’ll get a paper statement, telling me that I made/netted (the remaining) 2.5%/$500.00, on my investment this year.

Now, MERs and gross investment returns fluctuate year to year, but, over your investing life time (40-50 years), you will give up in MERs, 40 to 50% of your gross profits to the (crooked) investment firm.

This, is the white elephant in the room; your corporatized investment guru will not explain to you in detail, unless pressed, very hard. But, you will find it all explained in legalese, in the very fine print in the contractual paper work you signed with them.

QUESTION: How can I pay a lower MER on my RRSP investments?


~Lower MER ‘Index’ funds –Versus-- Higher MER ‘Actively Managed’ Funds~

Actively Managed Funds
Why will the vast majority of investment managers steer you toward ‘actively managed’ funds ?  Because they charge a (much) higher  MER of 2.5, 3.0, 3.5%.  And if you didn’t know any better you’d say, “Geez, 3% (three dollars) for every one hundred I make is pretty good ! But now you know better…

It’s the FIRST 3%  [STUPID]  of your 6%   = 50%

They will tell you, that we charge a higher MER for ‘actively managed funds, because we have hundreds of professionally trained investors who spend all days combing the world, ‘actively managing’ your funds, to get you the best possible returns….to beat the markets, to beat the TSX, the S&P 500, etc…  They are ‘stirring the pot’. And with each stir, your MER goes up a fraction of a percent.

The 2nd elephant in the room,

Is that ‘actively managed funds’ (by ‘professionals’) RARELY outperform the markets [the TSX, the S&P 500, etc…). In fact, they normally underperform them; but, you get to pay more for that privilege.

Hopefully, you can taste the sarcasm, dripping off my keyboard…

Index (Tracking) Funds
Index funds, very simply track or ‘mirror’ a given stock exchange/market; The Toronto Stock Exchange (TSC), American S&P 500, etc…  If the TSX gains 7% through the past year, you make 7% (MINUS (you guessed it; your magical MER)) . Thus a 7% gross gain, minus our hypothetical (but your (very real) MER of 1.2%, allows us to net out a profit of 6.8% .

This, is much better than an actively managed fund, as is plainly obvious. Many Index funds cost well below a 1% MER; many are in the .5%, .75% range. It takes a bit of digging and persistence.

Index funds can charge a lower MER, because instead of a pool of professionals trying to stir the pot, to beat the markets, a computer, simply tracks the performance (or Index) of the particular stock market.

I spent a decade+ paying 'Investor' Company MERs to manage my RRSPs, invested in actively managed funds, paying them well above 3%.  Keep in mind that Canada has on average, the highest MERs in the known world, and 'Investors' Company charges some of the highest in Canada. After all, they have to pay themselves some fairly high wages, and pay for all of those Cable TV ads that are continuously spewing forth.

Once I realized, that 3.5% meant the FIRST 3.5%, I asked my 'Investor' Company guru, if Investor Company offered RRSP investing in Index Funds. The initial answer was a non-answer, in that he simply informed me that “ He was convinced that he had us best positioned for our long term interests ”.

So, I when back to him and specifically asked, “Does 3.5% meant the FIRST 3.5% ? “. And, to his credit, he answered, “Yes.” . 

I expressed my amazement; and he was quick to point out, that a decade+ or so previously, I had signed a piece of paper, where it was explained and thus I had legally acknowledged, acknowledging that it’s ‘the first…’ and not $3.50 for every $100.00

To this day, I still have a hard time wrapping my brain around this concept. Had my Investor Company guru, precisely explained this concept in language I would have understood…  my immediate response would have been, “are you out of your mind ?   I’m going to effectively pay you between 30 and 50% of my profits, so that you can stir the pot, vainly trying to beat the market averages ?  I don’t think so, would have been my reply.

Through the majority of that decade+, I was netting roughly 6% on any given year. With my MERs in the 3.4% range, (meaning I was grossing 9.4%) you can see that I was paying Investor Company, approx. 35% of my profits to active manage my ‘portfolio’ (such a fancy smancy word)  (Remember, ‘actively manage’ means they are professionals…) and through all of this, they were doing neither no better, nor any worse than ‘average’.

It was this 35% that was missing, and that gave me a ‘feeling’ in my monthly investment statements, that something was not adding up…

The third elephant in the room,

Is that you get a monthly statement that gives you the overall value of your investments generally in what is called  a ‘UNIT VALUE’ ; this unit value fluctuate within the stock markets, up and down, each day, month, year… So as markets fluctuate, and your focused on the unit value, attempting to track whether your making any money or not, your somewhat oblivious to the  (in my case) 35% of my profits that were getting skimmed off without my knowledge; Because I did not really understand what an MER was, and I certainly did not understand, that an MER of 3%, meant the FIRST 3%. My bad.

Thus, I should have been invested in ‘passive’ Index tracking funds, (which I am now with a different investing firm, thank you very much) being charged something in the  1 -1.5% range, and I would have still grossed 9.4%, BUT, netted out,  making on average 7.9% profit.
Netting a profit of 7.9% is significantly better than 6%, especially over the long term.
It’s not just 6%, you can now understand that it works out to 40-50%, depending on your circumstances, your gross profits and the (transparent/unseen) MER you’re paying some guy in short pants, the in the vast majority of cases, match, if you’re lucky, what the market is performing at,  all by itself.

So, having gone through this I hope and trust that I’ve been able to clearly explain that the charged MER is the slice in percentage points that the investing advising guru, takes directly off your gross gains, before you see it. (and you have to figure, there is a very very good reason [for them] that they do this…it assists in keeping you, the chump, ignorant).

If the MER is 2%, (as it is commonly with actively managed funds)and I gross 6% (not uncommon in today’s 2014/15 investing climate), your investing company takes the FIRST 2% of gains, leaving you with the remaining 4%; This means you’re giving them (in this case) 33% of your profits. 

THIRTY THREE PERCENT ! That, IMHO, is highway robbery and should be a criminal offence.

These MERs in my case were what is called ‘front end loaded’ funds, in that the MER is taken off at the front end, ‘before’ I see my net gains…  Some funds are ‘rear end’ loaded. Some funds have additional charges every time they ‘stir the pot’, moving your money between investments, or between funds.

Statistics over the long term, (YOUR long term investing of 30-40-50 years) have shown that with actively managed funds, the MERs eat up 40 to 50% of gains.

Over the short term, you may not notice much of an effect. (I did, and that’s why I started asking questions.But it took 10 years for me to catch on !) However comma, over the long term, this can and does mean, that instead of netting out with a $250,000.00 retirement fund (with an Index fund charging a 1% [or better] MER), you’re going to end up with 130,000.00 – 150,000.00 . 

Yes, a ONE HUNDRED THOUSAND+  DOLLAR DIFFERENCE, over a lifetime of investing.

That ladies and gentlemen, is going to translate in a huge difference; in the monthly ‘annuity’ you eventually create from that money, to finance your retirement.
Now, you know better.

I have spent considerable time on the internet, looking for papers/web sites/authors, that explain this phenomenon if it being the first XX % of your gross profits, without a lot of success. You can imagine that it’s not in any investment advisors interest to be completely transparent about it, is it. They stand to make more money from your/our ignorance. 

Let me say that it is not just Investor’s Group that enables ignorant clients, it’s the entire industry. They [all of them] will claim that they have a financial gain to make, from being completely forthright, open, and transparent. After all, if they make you money, you will stick around, recommend them to others. That’s how the ‘grow the business’. 

I submit, they grow the business, the profit margin, from keeping clients ignorant. IMHO, it highway robbery with a smile on their face. It is unfortunately, perfectly legal, thus making them nice guys in a shirt and tie. They will make the average schumk 200K in long term profits. However comma, what they will not tell you is to walk down the street, and invest in an Index Tacking Fund, paying a .5% MER, and thus making an additional 150K.

The few sites that have broached the subject, do so in language that often obfuscates the message. And as you can now appreciate, the message is initially beyond belief and comprehension. It took me a few days of saying, “it can’t be” to figure it out.

Additional opinions on this subject (complete with charts & graphs on the subj):

I encourage you to forward this to everyone you know who has set up a retirement fund, so that it becomes common knowledge. The financial industry presently has legal licence to fleece the world, as long as we are ignorant.

Declaration: spelled checked @ 0741 11 Oct 2015


  1. Financial sage wisdom from [of course] John Oliver's comedy show. Seriously.

  2. I've since been informed that if you get your Investor's guy drunk, you can actually get them to admit that no one, none of the 'active management' dudes, actually have thier own money in actively managed fundds. They have all thier money in Index Funds. Who wudda thought ?