the broken typewriter

By Brad Brain

Lately I have had some conversations that have had a similar theme. Unfortunately, the common sense that sparked the conversation has been, in many cases, obliterated by a dogmatic pursuit of something that seems like a good idea – seeking low fees on your investments.

I’m in no way advocating for high fees, but the microscopic analysis of fees on your investments really is getting too much attention relative to more important matters.

And often it’s undeservedly so. If your mutual funds happened to go down by ten percent, it wasn’t merely the fees that caused that. It was the markets.

If your mutual fund was down ten percent last year, its probably going to be because the market is off by ten percent, and similar mutual funds went down by about ten percent too. It’s just a question of whether they went down by 9.8% or 10.2%. Fees cause incremental changes to your results, they don’t drive your results.

Sure, incremental results are worth paying attention to, but the more important issue – by far – is owning the right investments in the first place, combined with your own behaviour as an investor. Get these things right and you now have the luxury of trying to seek incremental improvements. Botch these things, however, and the effect of fees on your portfolio will be drowned out by far more impactful forces.

Without question, all things being equal, cheap fees are better than expensive ones. At the end of the day the less that you pay in fees the more that is left for you.

The potential problem is if you blindly accept the dogma that cheap equals better, and you stop thinking about stuff. The question of fees on your investments is a legitimate question, but it’s a question that potentially can backfire on you if you don’t have your priorities in order.

It’s fine to compare the total cost of similar products. The problem is that if you start favouring bonds or GICs over equity funds based purely on price. That is not a logical comparison. You are comparing the price of two different things. It would be like saying a box of crayons is less expensive than a choice cut of steak.

Would you make the decision to buy crayons versus steak based purely on price? Of course not. I don’t really care how cheap the crayons are if I am hungry, and I wouldn’t care about the fine quality of the steak if I was a vegan.

For decisions like this the primary deciding factor is what it is that you are trying to do. Are you needing supplies for art class or for a backyard BBQ? Having determined what you need, it is then appropriate to price shop. But first you have to determine your needs.

There isn’t a week that goes by when someone asks me a question to which I reply, “It depends on your objectives.”

Should I top up my retirement savings plan? Should I buy or should I rent? Should I get a term insurance policy or a permanent insurance policy? RRSP or TFSA? It all depends on your objectives.

Always keep your objectives in mind. Having first determined what products will meet your objectives, you can then look for the best price. But looking at price first means you might be trying to cram your size 10 feet into size 9 shoes because the size 9’s are on sale. Even if those size 9 shoes were cheap, they are not a great fit.

In fact, simply having the lowest cost portfolio is not even a financial objective. Your objective is going to be something along the lines of being able to retire when you want, with the lifestyle you want and to be able to maintain that lifestyle for the duration of your lifetime. Alternatively, it could be seeing your kids through post-secondary education without hanging the albatross of a six-digit student loan around their neck. Or it might even be to be able to be there for your aged parents when their health starts to fade.

Those are real objectives. Keeping costs down may help you reach your objective, but it isn’t an objective in itself.

You want to be cheap? Sometimes that can be a case of be careful what you ask for. If the product is a bad fit, and it doesn’t move you closer to your objectives, then it doesn’t matter what the price is.

First things first. Figure out what your objectives are, determine what types of products are consistent with your objectives, and then – and only then – is it appropriate to look for ways to bring your costs down.

Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.