My husband and I are age 49 and 53. We have approximately $800,000 invested through a full service broker and a separate portfolio of stocks we trade on our own, worth about $100,000. We do not feel comfortable investing all these funds on our own. I have two questions; 1. We are paying a 1.25% fee to manage these assets and received a 2% return last year. For some reason this fee seems high in proportion to the return. Does it seem reasonable? 2. What would you suggest to do with these funds?
“It’s all relative.” And relatively speaking, it sounds like you’ve got a pretty good thing going with your financial adviser, both in terms of fees and performance.
You pay a 1.25% fee, which is $10,000. For the size of your portfolio, this is the going rate. If you were in traditional mutual funds with MERs of 2.5% your fee would be $20,000, proving that fee-based versus commission-based is a more economical choice for you.
Your performance relative to the market also looks good, based on the limited information you have shared. It might not feel good when you’re only up 2% on the year, but relative to the TSX (down 11%), and the S&P 500 (flat), you did pretty well, depending on your asset allocation. Some years you’ll be up 2%, or even 10% and some you’ll be down 10%. You can’t actually compare the 1.25% fee to the performance on the year. Instead, you need to look at the fee in terms of whether you feel you’re getting value for your money over time.
You may have your own criteria to assess your financial adviser, but here are the five that I use to do the “value” check.
1. Delivers performance that meets the benchmark index over time. It looks like your adviser did that last year. Now it is important to look at performance over a longer period of time to see if she is still delivering the goods. An example of a benchmark index is the TSX Composite—it is the “benchmark” for the performance of Canadian equities. Your international, U.S. and fixed income holdings should also be compared to their relevant benchmarks over time.
2. Communicates in a way that works for you. Does your adviser give you the service you want, when and how you want it?
3. Provides solid advice and doesn’t just sell products. This is much easier for a fee-based advisor to do because they don’t have to generate commissions to earn their keep. Do you feel like you’re getting the advice you need?
4. Understands and works on all your goals. The best financial advisers out there are able to think holistically and provide advice on how to achieve all sorts of goals—experiences you want to have, goals for family, home, contribution etc., not just those related to retirement investments.
5. Holds you accountable for achieving those goals. A personal trainer will hold you accountable for showing up to work out, and you pay that person way less than your adviser. The best financial advisers aren’t afraid to hold their clients accountable to deliver on what they say they want in life.
Here are the specific steps I would recommend you take to ensure you’re getting value for your money.
1. Review these criteria and score your adviser from one at the low end to five at the high end.
2. Book a meeting with your adviser to discuss what is working well and what isn’t working as well as you’d like. Ensure that a review of performance versus the benchmarks over time is included.
3. Ask if there is room to negotiate your fee. Perhaps including a portion of the $100,000 you have elsewhere would get you down to 1%.
4. Discuss ideas on how to get even more value out of your relationship—perhaps they have insight on taxes, estate planning, or providing services for your family members that would make your partnership even more valuable.
The bottom line is that it is up to you, the client, not the financial adviser, to ensure that you get value from the fees you’re paying.
P.S. Regarding your second question about what to do with your funds. This is a question best directed at your financial adviser.