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.