Q: I’ve been investing for years with a financial advisor I really like. I have about $200,000 in high-fee A-series mutual funds and I would like to switch into low-fee ETFs, but my advisor doesn’t deal with ETF portfolios. How can I change my investment strategy without causing any hard feelings?
— Worried investor in B.C.
A: Whenever you consider two investment options, it’s important to make a fair comparison. ETFs have low costs because all of the management fee goes to the fund provider. On the other hand, the management expense ratio (MER) of an A-series mutual fund includes the fund manager’s fee plus a trailing commission that goes to your advisor. This usually adds an additional 1%.
While it’s reasonable to pay an advisor 1% for excellent service, fund MERs often charge an additional 1.5% or more that goes to the investment managers. Since the majority of these funds are doomed to lag their benchmarks, those high fees are hard to justify.
But there’s a problem: Many mutual fund advisors are not licensed to sell ETFs, so they cannot offer them even if they wanted to. If you’re dead set on using ETFs, you’ll either need to find a new advisor who is appropriately licensed, or you’ll have to manage your own ETF portfolio at an online brokerage, which also means giving up the services you’re currently getting from your advisor.
You might also speak to your advisor about other mutual fund options. It’s often possible to find A-series mutual funds with MERs around 1.5% (including the trailing commission), which may allow you to lower your costs and still get the service you value.
—Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto