Helping friends switch from mutual funds to ETFs

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birdiepars
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Helping friends switch from mutual funds to ETFs

Post by birdiepars »

Hello need some help/clarification. I've looked a bit online, but just to clarify as I don't fancy myself as a tax specialist.

Helping my friends (couple with 3 kids) switch their money from mutual funds to ETFs. Part of their funds are in RRSP and some non-registered. If they choose to switch the funds, what are their tax implications. Assuming they have held the funds long enough that they have increased in value, do capital gains taxes come into play in both situations? Any help/clarification is appreciated.
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Re: Helping friends switch from mutual funds to ETFs

Post by brucecohen »

Cap gains tax due only on non-registered funds. No tax due on movements within RRSP.

Were any of the mut funds bought on a deferred sales charge (DSC) basis? If so, report back and we can offer tips on how to reduce that hit.
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Re: Helping friends switch from mutual funds to ETFs

Post by Peculiar_Investor »

brucecohen wrote: 31 Jan 2018 22:59 Were any of the mut funds bought on a deferred sales charge (DSC) basis? If so, report back and we can offer tips on how to reduce that hit.
That's a very important consideration when moving away from mutual funds.

There has been discussion of this topic in the past on FWF. One such topic I found is Collapsing Mutual Funds and Selecting Replacements.

Depending on the size of the portfolio, there might be some low cost mutual funds (TD e-series) that might also be suitable for the OP's friends. Perhaps a read and review of our wiki article Simple index portfolios - finiki, the Canadian financial wiki might be helpful as well.
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birdiepars
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Re: Helping friends switch from mutual funds to ETFs

Post by birdiepars »

Thank you for the initial responses. I will review the links mentioned. I was also wondering about the DSCs, I don't think they were able to determine that information yet. I assume that information would be available on their paperwork or would that information be available in the prospectus as well? Thanks again for the wealth of information available online.
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Re: Helping friends switch from mutual funds to ETFs

Post by newin96 »

They may have to call the funds themselves and have the account numbers available - the funds can provide the amount and expiry.
Then determine (if any) DSC cost to the benefit of reduced MERs from proposed changes.
That's what we had to do when we looked into what our (now former) financial planner had us in. Serious back end fees... some of which still remain significant until 2020.

For me it was the cost of learning...
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Re: Helping friends switch from mutual funds to ETFs

Post by pmj »

I moved my DSC MFs to Questrade where the "Mutual Fund Maximizer" program reimburses the trailer fees. Typically they're in the 1% range, but there is considerable variation. There is a $29.95 monthly fee. http://www.questrade.com/trading/servic ... _maximizer
I then take advantage of Questrade's no-commission-on-ETF-purchases program to mop-up the reimbursed fees.

Also, MacKenzie, for example, on request will move all DSC-expired funds, plus (each year) 10% of the remaining DSC funds, to the non-DSC funds. The fund prices and trailer fees are the same for both DSC and non-DSC.
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Re: Helping friends switch from mutual funds to ETFs

Post by DanH »

birdiepars, the first thing that occurred to me when reading your question - out of genuine curiosity/concern, not to pick a fight - was: Are you are up to the task of helping your friends?

I ask only because your question is a fairly basic one; which suggests that you're kind of learning as you follow this path to help your friends. There is nothing wrong with not knowing something; nobody knows everything. But if you are effectively advising others - even if only as a favour - I wonder what other details you might miss - and not even know to ask about - if you are unsure of some of the basics.

Good on you for wanting to help; and for visiting this forum - with so many knowledgeable and helpful people. I have helped many friends and relatives transition their portfolios - and I do this for a living - so I know the weight of responsibility that accompanies taking on such a role.
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Re: Helping friends switch from mutual funds to ETFs

Post by OhGreatGuru »

I had the same concern as DanH. If neither OP nor his friends know the answer to what is a fairly basic question, I'm not sure OP should be advising. And the friends are in danger of making mistakes in these transactions that they will regret.
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Re: Helping friends switch from mutual funds to ETFs

Post by ig17 »

OhGreatGuru wrote: 02 Feb 2018 17:08 I had the same concern as DanH. If neither OP nor his friends know the answer to what is a fairly basic question, I'm not sure OP should be advising. And the friends are in danger of making mistakes in these transactions that they will regret.
I hope you are not suggesting that they should keep their high-MER funds.

They found the right place to ask questions... that's a good start.
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Re: Helping friends switch from mutual funds to ETFs

Post by OhGreatGuru »

No, but if they don't understand a simple capital gains question, I have to wonder:
- Can they buy ETF's inside their current RRSP account now?;
- If not, do they realize they have to move the account?;
- If they are going to move their account(s), do they understand that they have to have the receiving institution transfer the RRSP so that it remains tax-sheltered?;
- If they don't understand this, will they they make the mistake of withdrawing the RRSP funds? (meaning they will have a big tax bill and no RRSP room left);
- With respect to the unregistered accounts, if they don't understand that selling the mutual funds results in a capital gain, are they capable of calculating the CG and estimating what the tax bill will be?;
- Are they capable of keeping track of ACB in the first place?

Maybe I'm reading too much into the Original Post, but to me the wording raises too many questions about whether they really know what they are doing.
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Re: Helping friends switch from mutual funds to ETFs

Post by ig17 »

It's not as hard as you make it sound. They will figure it out, one step at a time.
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Re: Helping friends switch from mutual funds to ETFs

Post by DanH »

ig17 wrote: 02 Feb 2018 17:24 I hope you are not suggesting that they should keep their high-MER funds.

They found the right place to ask questions... that's a good start.
Not necessarily but "high" doesn't tell us anything. I have seen some people refer to Mawer and Leith Wheeler MERs as high so it's not clear exactly what we're talking about in terms of high. I'll assume it's standard load mutual fund 2% MER stuff. But again, whether that's a good deal or not depends in part on how much these folks have invested. And in fact the OP says nothing about MERs being high or not; just that he's helping them out of funds and into ETFs.

Look I don't want to derail this thread. And I acknowledged in my response that it's absolutely a great start that: a) the OP is aware enough to stop and ask some questions; and b) came here of all places where I'd say s/he found the most knowledgeable group of (mostly) anonymous online posters.

But I raised the question - somewhat hesitantly - because it's the first thing that jumped out at me and it was nagging me the more I read the thread.
OhGreatGuru wrote: 02 Feb 2018 19:54 No, but if they don't understand a simple capital gains question, I have to wonder:

...

Maybe I'm reading too much into the Original Post, but to me the wording raises too many questions about whether they really know what they are doing.
Good questions. My concern was even higher level; just around understanding how to design an asset mix for somebody. It's second nature to many here but only after climbing the steep learning curve. There are now 600+ ETFs trading on the TSX. Most are actively managed. How will s/he navigate this fast-growing universe. Will s/he be able to avoid pot-stock ETFs, blockchain, and sector/country plays and just focus on the big stuff? Who knows.
ig17 wrote: 02 Feb 2018 20:11 It's not as hard as you make it sound. They will figure it out, one step at a time.
I chose my words carefully. But I asked the question that is worth asking - and was on at least one other person's mind.

All of this having been said, I will offer up one of my first Globe and Mail print articles - from 2009 - containing some tips for aspiring DIY indexers. ETF Rule: Keep it simple. With the exception of the fee benchmark noted (should be half of that listed now) and the number of ETFs (now you can hold as few as a single ETF) the article remains relevant today.
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Re: Helping friends switch from mutual funds to ETFs

Post by AltaRed »

I agree with OGG and Dan on the need to express caution. WADR to the OP, there is much to be comsidered in advising anyone, including regrets for potentially faulty advice. It is very easy to get blamed at least emotionally if something turns south. Don't be a Fiat helping Chrysler.

Best advice I can give is for the OP to steer his friends to this site, including FIniki, and perhaps Couch Potato, and provide moral support only to their journey.
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Re: Helping friends switch from mutual funds to ETFs

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If the Op advises and makes a mistake even if he doesn't make a mistake and bad things happen these people may not be friends anymore. An acquaintance at poker this summer asked me what I thought about Bitcoin. I thought it just a general conversation and said it wasn't for me. This was when it was trading at $4500 us, he waited, somewhat based on what I said and bought two Bitcoin at almost at the peak and now it's down to about half that so I'm getting some minor flack. Got to be careful about what you say never mind what you advise.
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Re: Helping friends switch from mutual funds to ETFs

Post by longinvest »

BRIAN5000 wrote: 03 Feb 2018 02:03 If the Op advises and makes a mistake even if he doesn't make a mistake and bad things happen these people may not be friends anymore.
I agree.

It's unfortunately best to simply tell people about where to learn about the stuff (e.g. links to Finiki's Simple index portfolios and this forum), and let them learn by themselves and make their own mistakes.
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Re: Helping friends switch from mutual funds to ETFs

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"The only thing worse than an amateur investor is an amateur investment advisor"

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Re: Helping friends switch from mutual funds to ETFs

Post by Jo Anne »

I am an accountant (retired), and every once in a while someone will ask me about investing. I always tell them I'm not a licensed advisor, so I can't help them.
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Re: Helping friends switch from mutual funds to ETFs

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Jo Anne wrote: 03 Feb 2018 12:12 I am an accountant (retired), and every once in a while someone will ask me about investing. I always tell them I'm not a licensed advisor, so I can't help them.
I always point them to finiki :D
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Re: Helping friends switch from mutual funds to ETFs

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Jo Anne wrote: 03 Feb 2018 12:12 I am an accountant (retired), and every once in a while someone will ask me about investing. I always tell them I'm not a licensed advisor, so I can't help them.
I have no problem telling anyone what I do and why. Most just want to know which stock to buy and I don't know the answer to that.
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Re: Helping friends switch from mutual funds to ETFs

Post by BRIAN5000 »

Just found this little video yesterday good enough http://www.moneysense.ca/videos/how-act ... nvestment/ if they can watch this at least it's a start and just a hair over 2 minutes. So if they can make it through this then I suggest https://academy.financinglife.org/courses/ take the free Common Sense Investing course. About 10 five minute videos, a little four question quiz after each about an hour total, wIfe and I did it together. Print out both PDF'S from here or the site*. If they can't make it through either of these because of time or any other excuse they should stay with an licensed advisor, the fees are irrelevant. If you don't have an hour each day to walk a dog don't get a dog.



*If these are not supposed to be posted please remove
Last edited by BRIAN5000 on 03 Feb 2018 20:12, edited 1 time in total.
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Re: Helping friends switch from mutual funds to ETFs

Post by kumquat »

deaddog wrote: 03 Feb 2018 12:39
I have no problem telling anyone what I do and why. Most just want to know which stock to buy and I don't know the answer to that.
This reminds me of when my kids started to buy cars (old, used ones). I'm a 'car guy' and know something about them. I gave no advice since that tended to imply a perpetual warranty. The same would be true with investments.

BUT, on the car front, we gave our (30 y/o) son my wife's old car. 3 years and 60K klicks it developed a problem. Both me and my DIL's father (a retired mechanic) pronounced it above our pay grade. My son took it to a garage where they diagnosed it and told him the fix ($30 in parts, $1200 labour). He could have done it himself (he is capable) with enough time (that he doesn't have), a place to do it (that he doesn't have) and the right equipment (that he doesn't have). He sorta begged me to fix it, he helped a bit. I have a place, equipment (hoist A/C, tools) and did it. Took me 23 hours althought the flat rate book is 11. I told him the parts and other supplies bill was ~$100. Haven't seen it.

He has asked about investments. I told hiom what I do. The only advice I give is "don't go near IG or EJ".
I don't intend to offend anyone, that part is just a bonus.

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Re: Helping friends switch from mutual funds to ETFs

Post by northbynorthwest »

Back to the topic of transitioning from mutual funds to ETFs…

Yes, there’s been a popular stampede to ETFs in recent years. But not all mutual funds are poor choices, and holding them doesn’t necessarily make you an idiot or uncool or something. :geek:
DanH referred up thread to Mawer funds, which are relatively low fee.
Some of the much wiser and more skilled heads than mine here have carefully analyzed their long-term stock picking performance vs Mawer Balanced (MAW104), and concluded they could not consistently beat the fund, or at least could not add enough extra value through their own active management to justify the time and energy expended. I also benchmark myself vs MAW104 and have to admit it has beaten me decisively over 10 years and very narrowly in 2017; I’m still ahead over 3 and 5 years, so haven’t thrown the towel in quite yet.
My point is that there are mutual funds that get considerable respect, even among talented DIY’ers.

If most of the friend’s portfolio is in the RRSP, and particularly if it’s not an account that can buy individual stocks or ETFs, then they might consider simply selling the ‘bad’ funds and switching to ones with lower fees and respectable long-term performance. (Not that I’m giving advice here!)
I try to remind myself often: don’t let the perfect be the enemy of the good. Especially when ‘good’ is easier and faster.

Also, ETFs open up worlds of new danger, esp for newbies inclined to chase hot volatile sectors. Mutual funds may be high in fees, but with them it’s a lot harder to get in the sort of trouble that is possible in ETF land, where you can bet the nest egg on exotic offerings like double inverse leveraged ETFs based on the crazy swings of nat gas, or bitcoin-tied ETFs and similar kookiness. Not everyone who makes the leap from funds to ETFs will necessarily follow (and stick to) a careful “couch potato” style methodology.
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Re: Helping friends switch from mutual funds to ETFs

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So the PDF was downloaded 8 times very basic but good to read once in a while IMO especially the tip about "Your savings rate is as important as your investment return". I would reword that to "Your savings rate is MORE important than your investment return" even for those with Networth around a million or so.

Did anyone go to the website and watch anyone of the videos?*

If you didn't how come?
What would make you go watch a free video or steer a beginner investor to watch these, the "possibility" of a CASH incentive, a cash incentive like a starbucks card.

One of my friends would do it for $30?

*For my own personal interest, I forwarded the link to a few friends that were asking for information no one took the time to watch the videos?
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Re: Helping friends switch from mutual funds to ETFs

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BRIAN5000 wrote: 03 Feb 2018 02:03An acquaintance at poker this summer asked me what I thought about Bitcoin. I thought it just a general conversation and said it wasn't for me.
I say I don't invest in speculative stocks. Did that 25 years ago. Don't need to anymore. Too risky.

(My play money does not count.)
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Re: Helping friends switch from mutual funds to ETFs

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kumquat wrote: 03 Feb 2018 19:00This reminds me of when my kids started to buy cars (old, used ones). I'm a 'car guy' and know something about them. I gave no advice since that tended to imply a perpetual warranty. The same would be true with investments.
and nearly everything else. Appliances, houses, electronics. I usually tell them about my bad purchases. But I never recommend anyone to buy what I bought. It is like this thread. You cannot give advice without knowing so much about them. Best to point to sources.
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