Time to Negotiate

 In Value For Money Investing

Since beginning this column over eight years ago, the most common subject has been about fees in one way or another.  My very first article was about how cost matters and the second was simply about fees.  Many more articles on the same or related topics have followed.  Why?  Well it is agreed in the investment community, that the best reliable indicator of future success with a particular investment strategy, is to pursue the fees.  Fees and costs do not only matter, they are often the foundation for success.

Thanks to a majority of security and investment regulators in Canada, 2018 will be the year when much more complete and relevant disclosure will be provided to you about fees.  How much your investment advisor is compensated and how much you are paying your fund managers will become less obscure, more detailed and hopefully more understood.   This will be an ideal time to have that conversation with your investment advisor that you have been putting off for such a long time.  Why am I paying so much?

The purpose of this current article is to give you some assistance and guidelines to help with this conversation.  First pay careful attention to the dollar amounts not the percentages.  One and a half percent (1.5%) may seem small as a percentage but it is $7500 per year on a $500,000 portfolio.  Seems a lot of money in dollars doesn’t it?  Why did I choose one and a half percent (1.5%) as an example?  This is the standard and usual fee for Fee Based accounts at many independent and bank brokerages.

What Are You Really Paying For?

It probably took you months of work to bring home $7500.  What can your investment advisor possibly be doing to earn that?  Surely not just a couple of telephone calls, a fancy newsletter and a few meetings?  As a advisor myself, I would like to relate to you all the things I do to justify such a generous fee as $7500, but I can’t because you should not be paying anyone that much including me, for management of a $500,000 portfolio.  In the US, there is growing amounts of literature that espouses paying no more than one half of a percent (0.5%) or $2500 for the same size portfolio.  Canadians, both as industry providers and as consumers, are still learning to work at these levels but even here in Canada, one percent (1%) is the maximum you should be willing to pay for investment management services.  We think less than one percent should be your target.

From Mutual Funds to ETFs

As the mutual fund industry is confronted with more complete disclosure, there will be pressure for your investment advisor to answer for the fees you now more fully understand.  Many are preparing for this by being proactive with their clients and moving them from high cost mutual funds to low cost Exchange Traded Funds (ETFs) in Fee Based accounts.  But beware.  A well designed portfolio of ETFs still has embedded expenses averaging .2% to .3% at best with custodial and trading costs likely added on.  A 1.5% fee from your advisory firm still puts you close to the 2% costs of many of the mutual funds you are giving up.  Your investment advisor is taking you in the right direction.  Help him get you there by not agreeing to pay more than one percent for the advisory services.   If you are already in a Fee Based account, call your advisor and insist on a reduction to one percent or below.  Ask about all the other costs that might be involved.

Discuss Your Fees

This is also the year that financial planning will become much more widely talked about, though unfortunately not for the best of reasons.  Discussions about high fees are often deflected by pointing out the valuable financial planning services that are included in the monthly fees.  Those services might include ongoing cash flow management, ongoing tax planning, tax return preparation, estate plans, insurance evaluations, pension calculations and help with managing the motions inherent with being an investor.  These are certainly extremely useful and valuable list of services, IF indeed provided. But many advisors do not provide them and just as importantly, many clients do not press for them. There is not much value if these services are not delivered.  In addition, financial planning does undoubtedly justify some fee but not $7500 just because you have a $500,000 portfolio.  For around $5000 per year, our company provides an extensive array of financial planning services, tax preparation, with customized portfolios designed around your financial plan. All portfolios are integrated with a portfolio management solution using ETFs.  Our experience has us believing that the financial planning portion is worth more than half the total, which places the value of the investment management alone below $2500 per year.  Why would you pay $7500 for regular calls to see if you have more money to invest?

If your investment advisor’s organization wants more than one percent in annual fees, just say no!


Value For Money Investing     

Value For Money Investing means we wish to allocate and use our hard-earned resources in order to improve investment outcomes in a continuous and sustainable way at a fair and equitable price. In other words, achieve good investment returns AND receive fair value for the services provided. The path forward is Advice For a Fee financial planning.

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