President’s Choice Financial has long been a favourite of frugal Canadians looking for no-fee banking. But until a reader pointed it out to me recently (hat tip to Greg S), I wasn’t aware that the online bank also offers low-cost index funds through its partnership with CIBC. True to its nature as a discount bank, PC Financial even offers investors a rebate of 10 basis points off the funds’ annual management fees.
Here’s how it works: banking customers can open an RRSP or non-registered account and invest in any of CIBC’s family of index funds. CIBC has the second-largest selection of index funds of any bank, behind only TD. Investors have a lot of choice here, including some index funds that are unique in Canada: the CIBC US Broad Market Index Fund — which tracks the Wilshire 5000 rather than the S&P 500, like most of its competitors — the CIBC Emerging Markets Index Fund, and the CIBC Canadian Short-Term Bond Index Fund. This means you can build a very well diversified index portfolio with asset classes that would otherwise be available only through ETFs.
Another attractive feature of the program is the Index Portfolio Rebalancing Service, which automatically adjusts your portfolio twice a year according to your chosen asset allocation. This is a service that many novice investors will find helpful, especially if their portfolio includes more than three or four funds.
Nice funds, shame about the price
Now the bad news. The MERs of the CIBC funds range from 1.03% to 1.37%, which makes them the most costly index funds in Canada. The 0.10% rebate brings them in line with their counterparts from Scotiabank and BMO, but they are still much more costly than the index funds offered by RBC and Altamira, and about double that of the TD e-Series funds.
If we assume that a balanced portfolio of CIBC index funds would cost about 1% after the rebate, the annual cost is very close to the ING Direct Streetwise Funds, offered by PC Financial’s main competition in the online banking world. However, unlike the Streetwise Funds, which carry absolutely no fees other than their 1% MER, PC Financial levies several other charges in their mutual fund accounts:
- an annual RRSP administration fee of $12 plus tax
- withdrawal fees of $10 plus tax
- an account closing fee of $40 plus tax
- a $10 fee if your account balance drops below the (unspecified) minimum
- an early redemption fee of 2% if you sell or switch units within 90 days
I have often recommended the ING Direct Streetwise Funds for new Couch Potato investors with accounts under $10,000. I initially thought this offer from PC Financial would be even better, since it allows investors the ability to customize a portfolio, and has a much greater choice of asset classes. But this laundry list of additional fees is a deal breaker for me. Even if you never incur any of the other charges, the $12 administration fee alone wipes out the MER rebate on any account under $12,000.
Index investing only works when costs are kept low, and while PC Financial may be stingy with bank fees, its investing costs are simply too high.