The point: When you buy mutual funds from the bank, or an advisor, or through your employee plan, how do you know if you're getting what you're paying for?

I'm not a fortune teller, but I can probably guess what mutual funds you hold in your RRSPs. You have at least one "Monthly Income fund", something with "Dividend" in the title, and a managed portfolio of some kind, probably called "Managed Aggressive Growth" or "Managed Balanced"...right?

You might have all sorts of things, and today's not the day we talk about overlapping investments, or active strategies vs. passive strategies, or even whether mutual funds are the best investment vehicle ever (or not). Nope, today we're talking about price tags. 

I know the value of stickers, believe me.

How often do you walk into a store and buy something without looking at the price? Depends on the store and the item, doesn't it? I rarely look at prices at the Dollar Store because I have a pretty good idea how much items will cost and how much utility I'll get out of them (hint: not much, unless we're talking about stickers + an 11 hour trip to Pennsylvania with three kids under five, and then LOTS).

When I shop at the grocery store, it's another thing entirely, especially in the meat section. I plan my menu, scrutinize unit prices, and try to walk the (very thin; often invisible) line between "not enough" and "too much" food for the hungry pack of monkeys at home.

While it's not always an easy calculation, it's easier to understand the connection between price and utility when you're dealing with cheap glassware, stickers, or chicken thighs because trading money for stuff (useful or not) is something you do almost every day. It doesn't take much analytical research to determine that $1.99 per pound for green chicken thighs isn't a good deal no matter how you look at it. When you're dealing with mutual funds, however, the price tag is hard to understand, easily talked around, and disclosed to death, and therefore it takes real effort for regular people to understand and calculate the utility of what they're buying.

Now, understand that I'm not talking about the investments themselves. The unit price as a statement of the market value of the underlying securities isn't at issue here. But - unless you're at a level where you're buying stocks and bonds directly from the issuing companies and not paying commissions on the purchase or fees to hold them in a brokerage account (in which case, why are you here?) - you're paying money to invest, and you should be able to understand what you're getting so you can evaluate if it's worth it.

Simple, right? Sure. Well, let's start with what you pay for when you buy a mutual fund. 

Everyone enjoys a nice, rousing game of "find the disclosure", right?

If you buy mutual funds through a bank, you're probably buying "no-load" mutual funds. There's nothing you have to pay to buy or sell. Your advisor will ask you all of the mandatory Know Your Client questions, and apologetically hand you the prospectus, copies of the account documents, and one or more fund facts sheets.

The Management Expense Ratio of the particular fund(s) you're buying will be mentioned in passing, or at least circled in one or more of the disclosure phone book that just landed on the desk. What will never be discussed, or at least it will be discussed rarely enough to be statistically considered never, is what relation that management expense ratio (MER, for short, and because my fingers are already tired) has to your invested money.

See, you don't think about MERs because they're not listed as a line item on your quarterly statement and you don't have an automatic bill payment set up for them. They're tucked tidily away inside your mutual funds, reported as a teeny-tiny sounding percentage of the net asset value, meek, mild, and forgotten. What's a little 2.25% among friends? Or in the grand scheme of things?

Except - since it's money that you and all the other million people invested in the same mutual fund are paying to the folks who are doing the work of investing for you - it's kind of important. Just because it's not a litre of milk, or a sheet of stickers, or a car, you're not excused from the responsibility to evaluate the utility of your spending when you buy mutual funds.

Stay tuned next time, kids, when we talk about how to actually do the evaluating.   

The point: If you're starting out as an index investor, and are going to be regularly contributing in a self-directed brokerage account, the best discount brokerage for you is TD Direct Investing, but not for any of the reasons most reviewers list.

*UPDATED* This post is out of date, and those just starting out in the investing world would do well to invest with an online company like ShareOwner, WealthSimple, or NestWealth. See this post for reasons why.

So you're going to pull the trigger and invest in index mutual funds, boring as that may be. You've looked around, done some research, and - because you're just starting out - have chosen to begin your investing life by building a Global Couch Potato portfolio in a self-directed discount brokerage account, as popularized by Dan Bortolotti and +MoneySense Magazine: 20% Canadian equity, 40% US and international equity, and 40% Canadian bonds.

You've reviewed your spending plan, and figured out how much you can afford to invest every month, and you want to set it up as a regular contribution because you don't want your savings to depend on whether you've used up your limited supply of willpower that month or not.

Excellent.Here's where those of you just starting out might flounder a bit, because - although it's easy to find thirty different answers to the question "what discount brokerage do I use?" - it's harder to find one that specifically addresses you, the new investor, hoping to set up an automatic, regular savings plan into a long term index portfolio.

Hypnotized and confused yet?

If you search for "best discount brokerage", you'll find a lot of reviews that talk about "$9.95 trades" and "great research tools". Those features just don't matter*. The list of necessary features on the discount brokerage wish list is much narrower than for those looking to do research on the next dividend stock they're going to buy.

Your wish list is heavily slanted towards the cost to invest in, hold, and re-balance a portfolio of index funds, and the minimum purchase requirements for regular investment plans. "Ease of use" doesn't even make the list, and neither does "research and education" or "personal rate of return tracking", which are pretty much the only requirements Gail Bebee had in this review for the Globe and Mail.

It's right at "minimum purchase requirements for regular investment plans" is where we run into our problem. It is nigh on impossible to find an index mutual fund through a discount brokerage that you can purchase in any smaller increments than $100 per month**. At the bank***, no problem. You can split your hundred bucks into four different fund purchases and go merrily on your way. But try to invest less than $500 a month**** directly through a brokerage and you lose the option to invest automatically according to the 20/40/40 split you originally decided to invest in.

If you were originally planning to invest less than $500 per month in this account, you have three choices:

1. Increase your contribution to $500 a month. If you recognize that A) your money is finite, B) increasing your savings means you've got to decrease your spending somewhere else, and if C) the goal you're saving towards is important enough to do it, then by all means, save more money. Divvy it up in hundred dollar increments and go merrily on your way.

2. Automatically contribute to as many of your funds as you can. Provided you're planning on investing $100 or more every month, choose one (or more) of your funds to be the target, and plan on splitting it up every time you've got enough in it to do so. You're still investing automatically, you're regularly investing through market highs and lows, but you'll have to exercise some discipline in order to make sure you split your money.

3. Pool your money in a cash account. This is point two and a half, really, since the logistics are almost identical. You're still going to have to be disciplined about splitting up your money on a regular basis, you'll just be dollar cost averaging a little less often.

So how much is it going to cost you?

The short answer is: not much.

Since TD Direct Investing has the cheapest index funds with the lowest purchase minimums, that's where I'd send you (they don't pay me to say that). Until you accumulate $25,000, a basic RRSP account will cost you $25 every year, payable one year after you open the account and annually on the anniversary date thereafter. An RESP will cost you $50, and a TFSA won't cost you anything.

There are no fees to buy, sell, or switch between e-series funds, which means that the annual account administration fee is the only one you'll ever see on a statement.

The fees you won't see on a statement will be the management fees, fund costs, and HST or GST, which are helpfully expressed as a annualized percentage of the net money invested in that particular series (e) of that particular fund. They're the reason you're index investing in the first place, and - depending on how much you're contributing regularly and therefore how much of which fund you're buying - will cost you somewhere in the neighbourhood of 0.44% of your invested savings.

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*Okay, fine. They matter. Sort of. But the minimum standards of ease of use and reporting are going to be met by any platform, so they don't matter in a comparison.

**That would be at TD Direct Investing, using their e-series index funds.

***For the love of all that's holy, don't buy index funds at the bank.

****$500/month = $100 to Canadian equity, $100 to US equity, $100 to international equity, and $200 to Canadian bonds.

*****Holy crap, there's a lot of stars down here.   

Mutual funds are profoundly boring, although their ETF cousins have been known to be a little saucy. As an investor, you probably have a vague feeling that by buying mutual funds, you're performing the financial equivalent of buying a pink tract home and driving the same car to the same factory job as everyone else in the neighbourhood.

In fact, as a planner and former investment advisor salesperson - even one whose pretty self-assured, if I do say so myself - I sometimes wake up in the middle of the night and worry that no one will ever hire me again because I recommend mutual funds and everyone wants to invest in gold and Bitcoin ETFs and the Facebook IPO and....*

...and you can see where this is going. (It's going here, in fact.)

I'm going to say something unfashionable, but by no means original: if you're looking for excitement in your investment strategy, you're looking in the wrong place. Go get a hobby.

It matters how you invest your money, but it matters more that you invest it at all, full stop. It's easy to get so lost in the array of investment choices laid in front of you that you develop a burning case of analysis paralysis and refuse to settle for anything but The Best Investing Strategy Ever, holding onto (or worse: spending) your investment dollars until you've found a surefire way to make the absolute most amount of money on every dollar you save.

That strategy, The Best Investing Strategy Ever? It doesn't exist. The only way to know absolutely that an investment strategy is "the best" is if you have a door in your closet that leads to alternate universes, where every possible combinations of market events has a chance to happen and then be compared, and one particular strategy makes the most money every.single.time.

Therefore: ignore the niggling doubt in the back of your mind that simple, low-cost index investing is too simple for you. It's not. It's the cheapest, most reliable way for average investors to buy a few well-diversified pieces of the market month by month. Many people much smarter than me have already made the case for index investing, and I'm not going to pretend that I can make it better than they can (today, anyway.)

Of course you're not going go running to the bank to buy mutual funds; all they can sell you is their line of branded mutual funds, and just because RBC's Canadian Index Fund tracks the S&P/TSX Composite best, it doesn't mean the RBC International Index Fund track the MSCI EAFE best. Or for the lowest management fee, which means that unless you've got yourself a Bankosaurus Rex, or until embedded commissions are banned, the bank will be leaning on him heavily to talk you out of buying index funds.

The reason so many mutual fund investors are buying through the bank is because it seems so much less intimidating for an expert to make the trades for you, doesn't it? Less chance of a mistake that will wipe out your savings because you accidentally typed in the wrong fund symbol, or something, right?**

Permit me to cheerlead: you can do it. It's not hard, there are multiple confirmation screens, and the phone is right beside you. There's got to be someone you can call to walk you through it, or a book you can read (I whole-heartedly recommend The Value of Simple that can push your confidence just over the line just far enough to pull the trigger.

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*Actually, I only wake up in the middle of the night if one of my three monsters kids wakes me up. Other than that, I sleep the sleep of the righteous and boring.

**What? You think bankers and mutual fund reps don't make mistakes? It is to laugh. Ha.