A simple, cheap way to invest – how hard can that be to find?
Pretty hard, actually. There are so many tradeoffs between costs, service and advice. What for one person is a cost-effective way to save for retirement and other life events is needlessly expensive to someone else.
You can see this ambiguity in the Streetwise family of mutual funds offered by ING Direct, the savings account and mortgage people. There are only four choices in the group – including a new one for aggressive investors that debuts Tuesday – and each is a self-contained, fully diversified portfolio of index funds. Pick the one that matches your risk tolerance and goals, and that's it. ING handles rebalancing on a quarterly basis, so your mix of stocks and bonds stays constant through the years.
There's no cost to buy or sell Streetwise funds, and no minimum investment. The cost of owning them, measured by the management expense ratio, is 1.07 per cent.
Is that cheap? This kind of a question is especially relevant today. When the federal government introduced legislation last week for a new pooled registered pension plan program, it made low cost a key selling point. If employers choose to offer one of these plans, workers will be able to invest their money in products that cost substantially less than usual.
Banks and insurance companies will offer these cheap, pre-fab plans to employers, while continuing to sell their regular, higher-priced mutual funds to the masses. This two-tier pricing is bound to focus attention on investment fees, which is great news. As investors get better informed, they become more cost-conscious. This in turn puts pressure on investment firms to become more competitive by lowering fees.
People need some context to understand fees, and that brings us back to the Streetwise funds. By one measure, they do seem to be cheap.
ING mutual fund chief Silvio Stroescu says that of the $775-billion or so invested in mutual funds in Canada, about $500-billion is sitting in funds with an MER of 2 per cent or more. By that standard, you could save something like 50 per cent in owning Streetwise funds.
Nothing is simple in low-costing investing, though. The mutual fund with the 2 per cent MER includes compensation paid by fund companies to financial advisers who sell funds. These payments are called trailing commissions and, ideally, they cover the cost of financial planning work done on your behalf by your adviser.
Mr. Stroescu said ING is targeting people "who have investments with an adviser, but are really skeptical about the value of the advice they're getting." That's reasonable because some advisers are mutual fund salespeople and not advisers at all. Also, you're not investing entirely on your own with ING. Staff you can talk with on the phone are licensed to sell mutual funds, and they can coach you through the process of deciding which Streetwise fund is right for you.
But is that enough service to justify the cost of Streetwise funds? This question has to be asked in light of the fact that trailing commissions are buried in the cost of owning these products. Take the just-launched Streetwise Equity Growth fund, which provides 100 per cent exposure to the stock market (50 per cent Canada, 25 per cent United States and 25 per cent international). Built into the MER is a trailing commission of 0.4 per cent.
Mr. Stroescu said the trailing commission results from the way ING has set up its fund business. There are a couple of layers to it, one of them a fund distributor (that would be an ING division) that receives the trailing commissions. ING would be able to offer much lower fees on Streetwise funds if those trailers weren't built in, but that might cut into the level of service it offers to customers.
If you're familiar with Toronto-Dominion Bank's e-series of index funds, you'll understand this balance. These super-low-cost index funds are great for portfolio building as long as you're comfortable setting up and managing your account online. That means deciding on a mix of funds for your portfolio and then making adjustments once or twice a year to keep things on track.
"You'd have a lower cost if you did that, no question about it," Mr. Stroescu acknowledged. "But the clients that we're targeting are people who don't have the time or aren't prone to doing that."
Streetwise funds are simple, no doubt about it. But cheap? In assessing fees and value, generalizations just don't work. So let's just say that for unsophisticated investors seeking an instant portfolio that looks after itself, the answer is yes.
FUNDS FOR THOUGHT
ING Direct's Streetwise Funds do seem to be cheap, but nothing is simple in low-cost investing.
What are they?
Pre-packaged portfolios of index funds that cover off bonds as well as Canadian, U.S. and international stocks
Balanced, balanced income, balanced growth and equity growth
$550-million in total
Fees to buy/sell
Fees to own
The management expense ratio is 1.07 per cent.
Any amount is accepted.
Service to clients
Coaching on which of the four funds is suitable; automatic rebalancing of stock and bonds holdings in each fund is done in each fund every quarter.