Are you paying too much in investment fees?

Ned and Cathy are paying their adviser $14,000 a year in fees, but could reduce that to $100

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Q: My wife Cathy and I pay our adviser an annual flat fee of 1.25% to manage our retirement portfolio, which is worth about $1 million. But I’m not so sure I’m comfortable with this arrangement anymore. We’re buy-and-hold investors and I’m the one whose always telling our adviser what to do. What are our options for reducing fees and getting better returns? — Ned, Toronto

A: I find most investors are unaware that fees can vary greatly depending on the investment options they choose. In fact, my experience has been that many investors don’t even know how or how much they’re paying.

Just keep in mind that lower fees won’t guarantee higher returns, but they will certainly tilt the scale in your favour. For instance, if you can decrease fees or increase returns by just one percentage point annually, you can generate a one-third larger nest egg in 30 years.

Right now, you and Cathy are forking out $12,500 every year to your adviser. And because you live in Ontario, there’s an additional 13% Harmonized Sales Tax (HST), pushing your total fees to more than$14,000 a year—or 1.4% of your portfolio. (If you own mutual funds, there’s embedded fees to take into account as well.)

I find all of this concerning because you sound like a reasonably well-versed, buy-and-hold stock investor doing the majority of the buy-and-sell research yourself. It seems that your adviser is just an order taker and being paid quite handsomely to do very little.

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Ask a Planner

Leave your question for Jason Heath in the comment section below or email and he may answer it in an upcoming column.

If the two of you are going to pay 1.25% each year for portfolio management, I’d much rather see your adviser providing more active management that focuses on unique asset classes, proper diversification and a consistent investment strategy. This will at least give you the chance of outperforming the benchmarks that all too many advisers lag by an amount equal to their fees.

But if you do want to stick with your adviser, you should probably just be paying a transaction fee every time you buy and sell—in which case your fees might be more like 1.25% of the transaction and not the whole portfolio. Assuming a 15% annual portfolio turnover, your annual fees would be reduced to $3,750 plus HST. That represents a savings of about $10,000 or 1% of their portfolio annually—good news for the two of you, but not so much for your adviser.

Another option is for you to manage the portfolio yourself at a discount brokerage. This means you’ll no longer have your adviser to bounce ideas off of, but you could bring your fees down to $4.99 per trade and be paying under $100 a year in fees.

All of this isn’t to say that everyone should managing their own portfolios, but you’re basically a do-it-yourself investor already. Don’t be afraid to move to a discount brokerage and part ways with the perceived comfort of the bank. Someone with a portfolio as large as yours shouldn’t be paying full service investment management fees if they’re not getting the services that should go along with it.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products. 

13 comments on “Are you paying too much in investment fees?

  1. You are really doing Canadians a service Jason by your efforts to increase awareness of investment fees and their costs and ramifications. The financial impact numerically can be truly staggering. If only people would take the time to crunch the numbers and give serious thought to challenging the status quo from the point of view of considering:

    1. Cost – Benefit
    What are the embedded fees? As an investor/consumer am I getting the advice, service, results to justify these fees? Would I be comfortable writing a cheque to the advisor for this amount?

    2. Financial Implications
    How is my retirement account impacted by these fees? Will my savings grow slower because of these higher fees and will I have less to retire on? Will I have to increase the amount I have to set aside or take on greater investment risk because of the cost of fees over time?

    3. Cost of Inertia, Comfortable Status Quo
    Investing on auto-pilot or keeping your investment decisions on the back-burner is easy, comfortable but at what cost? Not being financially able to retire when and how you want? Needing to work longer? Being unable to financially enjoy a retirement lifestyle of your choosing?

    8 times out of ten, people are their own worst enemy through inaction and inability to demand answers to questions and accountability of their advisors.


    • @Shawn

      No one is saying your comments are wrong. What is wrong is the amount charged! ($14,000/yr) Once your clients portfolio is established, other then some re-balancing there is no more work or responsibility involved in a $500,000 portfolio then there is for a $2,000.000. one. A combination of the fee’s, and your clients “lost opportunity costs” from not being able to roll over a good portion of that $14,000 each year is astronomical. Just saving 1 % from say a 2% mutual fund fee over ones lifetime in a $1,000,000 portfolio could easily add up to an additional $350,000 for the CLIENT.

      How do you justify that loss? I’m tired of hearing “Financial planners” (especially the ones who really have little more then the basics in knowledge- like at banks) try to justify their unfair fees.

      I suggest you try this calculator.

      Secondly I suggest you look at the way “Steadyhand funds” (just as an example) are structured in the way they charge their fees. I’m not advocating mutual funds over ETF’s here, I just like how they reward their clients by REDUCING fee’s for more AUM (total money invested with them), loyalty and years invested with them. The above way (in the article) is simply a rip-off of clients and its time that model is broken up and rebuilt for the future. That also does NOT mean that advisers charge 1 or 1.5 % and put their clients in lower cost ETF’s then take the fee that way. Your just reworking the game and not saving the clients money. The “suitability standard” also needs to be replaced with a fiduciary standard in Canada. The suitability standard allows “bad actors” to overcharge clients in Canada.


      • @ Paul, the fiduciary standard won’t change how clients are charged on fee based accounts.


  2. Reducing or trying to eliminate as much as possible annual fees on all ones RRSP’s, RESP’s, TFSA’s, RRIF’s, non-registered accounts etc. is important but I always here about people not saving enough and piling all their money into a primary residence with mortgage payments, property taxes, utilities, insurance, renovations, maintenance and repairs etc.

    A couple that can save their maximum RRSP and TFSA each year can use long term compound interest in provincial strip bonds at 4.00% current annual yields today.

    For example, a $50,000 annual income per spouse would save and invest $14,500 per year and assuming 4.00% annual yields compounding interest over 40 years, ages 25 to 65, each would have $1,432,985 so combined RRSP’s, TFSA’s of $2,865,970.

    This would mean 38% TFSA income and 62% RRSP income which is not exactly balanced at 50%/50% but is not bad either for saving income taxes and trying reducing, eliminating pension and other benefit cuts.

    A smart saver with 4% to 5% an annual rate of return or compound interest expectations is a way to win financially.


  3. I was with a bank advisor for over 10 years. My experience was he did not give good service but was oh so friendly. I left him to do the investing for me, so what he did was invest in bank mutual funds with high MER’s…like over 2%. So, what I finally realized over the 10 years is that the higher my total investment became, the more they were taking out in fees (fees are a percentage). So a year ago I set up self directed accounts, moved all my investments there (registered, non-registered and TFSA). Then I rebalanced my accounts, investing myself by selling off much of the high fee funds (mostly in the registered accounts to minimize taxes), and reinvesting in low fee mutual funds and some ishares. Best move I ever made. Now I am in control!
    My experience with bank advisors is that they are there to make money off my accounts, not there to put my interests first.


  4. Interesting advice! How much of a return should an advisor be able to generate in this market? How much should a do-it-yourself investor be able to generate?


  5. I like this column. It’s not a pushy DIY-only type of high pressure piece, just really speaks about making sure you get value for what you pay – in whatever form that payment may take. I still believe in professional advice and that even the most DIY investors should hook up with a CFP (likely fee-based if they’re DIY), but otherwise good job, really nice column.


    • @ Meagan – But I think the column has a major omission. While correct in pointing out that 1.25% for a fee based account is actually 1.4% with HST, it is really only around 0.8% after tax for a typical high income earner since investment management fees are tax deductible. A column digging into financial fees should really make note of that.


      • I’ll note that my comment assumes the entire portfolio is non-registered; investment management fees are not tax deductible for RRSPs and TFSAs. It is ironic that HST is charged on fees paid in TFSAs – they should truly be “Tax Free” but the gov’t can get away with false advertising on that.


  6. I think we need to define what we mean by “financial advisor”. A lot of what I’m reading pertains to people I call “investment advisors”. A financial advisor or consultant as far as I’m concerned should be involved in the six disciplines of planning; tax planning, risk/insurance planning, estate planning, retirement planning, investment planning and cash management. I would define what you want out of the client-advisor relationship and then make sure that you are dealing with a company and individual that earns that fee.
    In the name of full disclosure I am a financial consultant with Investors Group and I do practice the six disciplines of financial planning.


    • @Richard

      That sounds like a great slogan but I believe we are addressing the cost of the investment portion only here. Although a family could use more then one product, each could be offered separately as they all carry separate fee’s, some more some less.

      Do you also disclose your MER’s, DCS’s and any “front load” costs when you sit with your clients. Do you spell out in dollar’s rather then using percentages to make the amount sound smaller? The average investor is oblivious to the real numbers on some investment products out there. There are certain annuities and other products pushed on people and I doubt people fully understand their fees + dangers – many times only the upside is presented to them.

      One thing I like to point out also is many of your clients would probably simply have better long term investment results if they bought your IGM or Power Financial stock directly, and reinvested the dividends for the last 15 years then investing in a collection of your funds and paying all the fees….


  7. It’s so easy when we are in a 5 1/2 yr bull run, everyone can pick winners. Easy as throwing darts at the stock page. Let’s wait till the next bear to come along and throw a curve at everyone’s portfolio. Then we can take another look at everyone’s “beat the benchmark” portfolios they built themselves.
    On a side note: you didn’t tell us what else the advisor was doing or has done for the clients, aside from the portfolio. Maybe nothing but at least you should have said that. It very we’ll maybe that there are other planning or services that are/were performed. Easy to criticize without the whole picture.


  8. I’ve been with Investors Group for about 7-8 years now…we like our advisor but I keep hearing that IG management fees are some of the highest in the business. Is it costly to switch to a new, perhaps fee-based advisor and get into new financial products?


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