Will Ashworth, a fellow blogger, wrote to me about the new ING mutual fund campaign. He thinks it’s misleading not to compare similar products.
I covered Streetwise on my blog . The one thing that isn’t discussed is the comparison ING uses in their marketing to highlight the benefits of Streetwise over other products.
They compare its 1% MER to 2.6% for the average balanced fund. That is traditional financial services marketing at its worst. They are comparing apples to oranges, passive to active. It’s completely misleading. I believe the product is a reasonable one. I just wish they would play fair in their marketing.
I found this an interesting argument, so I asked ING Direct for its comments. Here’s what I heard back from ING’s Paul McKenna.
Mr. Ashworth is entitled to his viewpoint. However, the Streetwise Funds are stand-alone balanced funds and we have made the direct comparison to the average MER for their peer category. Unless Mr. Ashworth doesn’t consider index funds to be mutual funds, the comparison is valid.
ING DIRECT is an advocate for saving and the intent of the comparison is to highlight how much Canadians pay in mutual fund fees and the impact the additional fees can have on the long-term growth of a investor’s portfolio. The Streetwise Funds provide investors with a low cost option with global diversification across stocks and bonds.
Within the index category we acknowledge that there are lower cost alternatives. However, depending on the distributor, they require the investor to be more involved in managing the portfolio than the Streetwise Funds do. One of these alternatives is a portfolio of ETFs that Mr. Ashworth proposes. Although the example that Mr. Ashworth uses on his website is accurate, he makes some assumptions that skew the analysis towards ETFs:
Mr. Ashworth assumes all investors pay $9.95 per trade to buy and sell the ETFs. This commission rate is one of the lowest available and is generally reserved for the most active traders or preferred clients with high balances. The everyday investor pays roughly $27 per transaction, based on the average of the posted commissions at the major discount brokerage firms (source: Investor Economics: The Retail Brokerage Report – Winter 2008).
He also assumes that the ETFs are bought and held for the five-year period without rebalancing (four Buys and four Sells only). The Streetwise Funds are rebalanced back to their original allocations on a quarterly basis. Even rebalancing the ETF portfolio once a year changes the cost structure significantly.
The final assumption is that the investor does not make any subsequent purchases or uses a dollar cost averaging strategy through regular monthly investments like an Automatic Savings Program offered by ING DIRECT, but a feature not available on brokerage accounts. Commissions would apply to each buy and sell of the ETFs.
The example also does not account for any account administration fees associated with RRSP accounts, which can add another $100 per year to the costs.
The low MERs of ETFs can be quite attractive for investors. However, most investors overlook the transaction costs and once you factor in commissions, rebalancing and other account related fees, ETFs can easily be a more costly alternative than the Streetwise Funds.
This response made Will Ashworth angry. He still wants ING to compare its new product to others that use the same investment strategy.
The real problem is that ING is using 2.6% as the benchmark MER for balanced funds in Canada. We should not be patting them on the back for this obviously manipulative manouevre.
Listen, if you came to me on the street and offered to sell me an iPod for 60% off the going price, I’d be crazy to turn you down. I don’t see how ING’s offer is any less enticing. However, in the case of Streetwise, you’re not actually getting 60% off.
Then, I asked Bylo Selhi to provide his views. While he’s an advocate of indexing, he’s also an independent thinker. Here’s what he said.
ING markets to relatively unsophisticated investors. These folks don’t likely have brokerage accounts, don’t know what rebalancing is, why they should do it, how to do it, etc., nor do they have the discipline to do it. Yes, charging 50 bp to rebalance on top of the ~50bp that TD charges on their eFunds seems high, but it’s half as much as what TD charges for the same service. (TD’s managed portfolios charge 1.25% to 1.5% for eFunds class.)
In addition, as Streetwise assets grow, it’s possible that ING will be able to pass some of the economies of scale back to investors by lowering the MERs. Consider that even at a 1% MER, ING needs to attract $1 billion in assets in order to generate $10 million in gross MER revenues. Out of that, they not only have to pay for fund management, client administration, regulatory costs, legal cost, etc., but they also have to pay for their launch marketing campaign. From a business point of view, 1% doesn’t seem that unreasonable, at least to start with.
As for me, I like the fact that a major financial institution is spending big bucks to tell Canadians about high MERs. But once ING gets that point across, I think it should also start advertising the fact that index funds have lower costs than actively managed funds and start comparing its MER with other similar products.
That would be playing straight with people who not only want to save their money, but to understand how they can save their money.