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Alternatives to High Cost Mutual Funds

Quinn Waddington - Oct 03, 2016
You have likely heard a lot lately about the high costs of mutual funds, including my post last week, but I have spoken to many who don't know what their alternatives are. 

Alternatives to High Cost Mutual Funds


You have likely heard a lot lately about the high costs of mutual funds, including my post last week, but I have spoken to many who don't know what their alternatives are.  Although mutual funds do have their place in small accounts that are being built up with regular contributions, Separately Managed Accounts (SMAs), including Exchange Traded Fund (ETF) portfolios, are a great alternative to higher cost mutual funds for any account over $25,000.


SMAs deliver investors similar professional management to mutual funds but have the extra benefits of increased transparency, the ability to lower fees, and no liability for taxes generated by the fund as a whole.


Mutual funds lack transparency in the investment holdings.  You have to wait until the end of each quarter to know what you are invested in but with SMAs, you will see all of the individual holdings and transactions done in your account on a daily basis.  Mutual funds also lack transparency in the fees being charged as they are simply hidden in the return of the investments.  With SMAs you will see each month in dollar terms how much your total costs are and the fees can be written outside of registered accounts.


While mutual funds have fixed expense fees, with the average being around 2.5%, the most we charge for SMAs is 1.95% and, unlike mutual funds, those fees can drop to under 1% as your account size grows. 


The last difference, which can be very important, is that when you are invested in a mutual fund, your money is just part of a larger pool.  If that pool incurs a taxable gain, even if you just bought in the day before, you will be responsible for your part of that tax liability.  With SMAs, you hold all of the positions individually so all gains and losses are only attributed to you.  This simplicity is one of the reasons SMAs can be much cheaper to invest in than mutual funds, lower overhead costs.


If you had not heard of SMAs, that is not a surprise as they used to only be for pension plans, institutions and ultra-high net worth individuals but that is no longer the case.  You can now access these accounts with as little as $100,000 and there is even an ETF version that is available for as little as $25,000.


The ETF Portfolios are set up in a similar fashion to the other SMAs with the exception that they only use ETFs, instead of individual positions.  They provide professional management for accounts with over $25,000 and because they don't dive down into individual companies, the fees on these portfolios start as low as 1.5% and can also drop below 1% as your accounts grow.


As you can see, SMA and ETF portfolios provided many benefits over traditional mutual funds but none outwiegh the ability to lower your investment costs by at least 0.5%-1%/year.  As you can imagine, a difference of 1% on your annual return will make a dramatic effect over the course of your career and retirement.


Now is the time to get more information on which SMA is right for you.  Give me a call (604) 699-0874 or send me an email ( so I can show you how saving 1%/year will let you do more with your retirement.



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