When investment fees are—and aren’t—worth it

Mauriusz is looking to lower his investment fees after he transferred his investments from a group plan to his bank

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Brokerages FeesQ: I am investing with a new bank-owned brokerage, but the fees seem to be higher than I expected. I’ve recently transferred my investments from a group plan through my previous employer. My current MER is around 2%, which may have a big impact on my yearly returns. Any ideas or suggestions to save on fees?—Mauriusz

A: I’m not surprised that you’re suffering from fee shock, Mauriusz. Group plans tends to have pretty low fees—as long as your company’s pension consultant is a good one—and retail investment fees are usually higher by comparison.

Sometimes people are reluctant to transfer money out of their group plans as a result and I don’t blame them. That said, group plans generally have fewer investment choices and they range from bad to good and everything in between, so transferring certainly offers more investment options and control.

In your case, you’re gone now and you’re tasked with evaluating your current options through the bank. Fees of 2% may be high or low, depending on how you are invested and what you are getting.

Is your adviser providing you with financial, tax and estate planning? That has a value, but it may not be worth the incremental fees relative to your old group plan.

If you’re in mutual funds, 2% is actually low compared to the industry average, Mauriusz. An Investor Economics report from 2012 pegged the asset-weighted average MER for load paying equity funds at 2.40%. If you choose index funds and take a passive investment approach—which isn’t for everyone—fees should be less than 1%.

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At the end of 2011, according the Canadian Securities Administrators (CSA), approximately 74% of the Canadian investment fund industry assets were in mutual funds.

So if you’re paying 2% on mutual funds, you’re probably better off than most Canadian investors from a fee perspective.

If your adviser has you in stocks and bonds, you probably have over $100,000 invested and 2% is on the high side. If you have hundreds of thousands to invest, you can typically get your fees down into the 1.25-1.75% range.

My big knock on the banks and mutual funds in Canada is that there are too few of them so the result is that they are too big and the market is too small. It’s tough for most of them to actively invest well and justify their fees. When you’re managing $10 billion dollars, taking even a 1% position in a stock is a $100 million investment. So most bank discretionary programs and large mutual funds end up being able to invest in only the largest of Canadian companies.

This lack of mobility means it’s tough for them to invest in niche companies and sectors and give themselves a real fighting chance of beating the markets. I think that active investors in Canada, for the most part, get their best value from small portfolio management firms that can actually build a portfolio that’s possibly worth the fee. Or you need a full-service broker who charges a reasonable fee in the 1-1.50% range or on a transactional basis with low turnover and has a disciplined investment approach.

Since it usually takes at least $100,000 and often more to be able to invest with these types of advisers, most average Canadian investors are stuck with mutual funds or over-priced bank-run discretionary programs that look just like the TSX with high fees.

It’s no wonder low-cost, passive investments like ETFs and index mutual funds are gaining so much traction. And this is probably more along the lines of what you were used to with your group plan from a fee perspective. So as is the case for all investors, a DIY approach is an option, Mauriusz. I have a personal bias towards ETFs over individual stocks if you go this route though. I find non-professionals (as well as some pros!) get it really wrong trying to be stock pickers.

If only the broader Canadian investment industry could figure out a way to charge fees that weren’t so exorbitant and more in line with other countries. Maybe investors wouldn’t feel the need to manage their own investments.

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

One comment on “When investment fees are—and aren’t—worth it

  1. I don’t agree that an MER of 2% could possibly be described as low. At that rate, after 30 years you have lost 45% of your money to fees! And over an investing lifetime of 60 years you have lost 70% of your money! Astounding but true. It’s just the math of compound interest working against you. Fess based on a percentage of assets under management are a scam perpetrated by the financial industry because people don’t understand how much they are paying. If I go to a lawyer for an estate plan, he/she charges me a fee for the work done, not a fee based on how much money I have. Why should it be any different for the financial industry? A fairer system is a flat fee based on the work done. There are companies in the US that charge a flat fee eg. $4500 a year regardless of the size of your portfolio. That seems fair to me.

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