Understanding investment fees

Posted on: June 4, 2014

WebFee has become a four letter word.

There is a lot of talk in the financial media about investment fees; is there enough transparency, are people getting what they pay for? Many Canadians would probably say they aren’t really sure how much they are paying and many are disgruntled.

It’s not surprising then, that we frequently receive calls from people wondering if they should manage their own investing to avoid fees, and whether a fee-for-service money coach or financial planner can help them. 

The short answer is no. “Advice only” advisors do not sell investments and are therefore not licensed to manage investments. Without that license the Canadian securities regulators do not permit us to give specific investment advice. As part of our comprehensive coaching programs we develop investment strategies with our clients, but we cannot advise them on specific stocks, bonds, EFTs or mutual funds they should invest in.

There is more involved in Do-It-Yourself (DIY) investing than most people think, and if your only motivation is to avoid fees, you may quickly find yourself overwhelmed and making costly mistakes.

Don’t fear fees, understand them.

To minimize unnecessary fees, know what services you need and ask the advisor what services you’ll be receiving.

For example, If you invest in mutual funds distributed through a financial advisor (usually referred to as “load” mutual funds), and you have a portfolio of $200,000 with a mix of stock and bond mutual funds, you’re probably paying an annual management fee of around 2%. This means that, every year, you are paying $4,000 to have your investments managed.  Roughly speaking, between 0.5%  and 1% of this fee (or $1,000-$2,000 per year) goes to compensate your advisor for providing you with service and advice. The rest of the fee goes to the mutual fund company to pay for investment research and selection, administration, marketing, etc.

You then need to ask yourself – am I getting $1,000-$2,000 worth of financial planning and investment advice every year directly from my advisor? Using an hourly rate of $200 (a typical rate for an independent advice-only financial advisor), this means you should be getting between 5 and 10 hours of your planner’s time and attention.  If you are, then you’re likely getting a good deal, if not, well, maybe it’s time for a serious heart to heart chat with your advisor.

Perhaps the middle ground between a full service investment advisor and the DIY scenario is a better option for your needs. There are several independent no-load fund companies that offer guidance navigating their selection of funds for lower fees. ( Check out Steadyhand, Leith Wheeler, Mawer, Phillips Hager & North ).

Fees are confusing, so never hesitate to ask questions. Whether you decide to go it alone or use an advisor, it’s in your best interest to educate yourself.

For a closer look at the structure of fees check out The Investment Fee Tree by Scott Ronalds at Steadyhand. Scott has done an excellent job explaining this complicated topic in his article and the accompanying infographic.

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The confusing world of financial advice – part 2


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3 Responses to Understanding investment fees

  1. Canadian Budget Binder says:

    WOW, that certainly puts it into perspective. Our advisor told us once we reach the $100,000 threshold we would pay less fees. We haven’t sorted the details yet but are working on it. It really does make you wonder whether you are getting what you pay for. Thanks for the post.

  2. Cynthia Callahan-Maureen says:

    Until I read this article, I thought Money Coaches Canada was a pretty good site.

    This article is extremely biased in favour of the myth that investment advisors can pick funds or stocks that will do better than others. Nobel prize winning minds have demonstrated the evidence that this is impossible. Using a fee-based advisor to help you determine your investment goals, risk tolerance and asset allocation in one of a variety of index or quasi-index funds is definitely an option. The fees for TD index e-funds are as low as one third of a percent per year. The fees for Dimensional Fund Advisor’s evidence-based approach that combines index style funds with a value and small cap slant for greater returns are about 1%.

    • Karin Mizgala, CEO Money Coaches Canada says:

      The article wasn’t meant to be a commentary on the merits of active vs passive investment management. The companies mentioned are a few examples of investment options available in most provinces that offer low fee investment management (the fees for balanced funds are between .88 and 1.34% ), have consistently good returns relative to benchmarks and provide accessible advice to clients with low asset level minimums ($10,000 – $50,000).

      Index or ETF options can work well for true DIY investors (our next article will discuss this topic), but most ‘fee-based’ advisors who provide index strategy asset mix and portfolio advice to clients that we’ve come across have minimum asset requirements of $250-500K+. If you have recommendations for great ‘fee-based’ advisors who can provide advice on passive portfolios to clients across the country with smaller portfolios, we’d love to hear about them.

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